e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D. C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 30, 2007
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Commission file number 1-6682
Hasbro, Inc.
(Exact Name of Registrant, As
Specified in its Charter)
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Rhode Island
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05-0155090
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(State of
Incorporation)
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(I.R.S. Employer
Identification No.)
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1027 Newport Avenue,
Pawtucket, Rhode Island
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02862
(Zip Code)
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(Address of Principal Executive
Offices)
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Registrants
telephone number, including area code
(401) 431-8697
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock
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New York Stock Exchange
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Preference Share Purchase Rights
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ or No o.
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o or No þ.
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ or No o.
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o or No þ.
The aggregate market value on June 29, 2007 (the last
business day of the Companys most recently completed
second quarter) of the voting common stock held by
non-affiliates of the registrant, computed by reference to the
closing price of the stock on that date, was approximately
$4,562,994,000. The registrant does not have non-voting common
stock outstanding.
The number of shares of common stock outstanding as of
February 11, 2008 was 142,599,724.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of our definitive proxy statement for our 2008 Annual
Meeting of Shareholders are incorporated by reference into
Part III of this Report.
HASBRO,
INC.
Table of
Contents
PART I
General
Development and Description of Business and Business
Segments
Except as expressly indicated or unless the context otherwise
requires, as used herein, Hasbro, the
Company, we, or us, means
Hasbro, Inc., a Rhode Island corporation organized on
January 8, 1926, and its subsidiaries. Unless otherwise
specifically indicated, all dollar or share amounts herein are
expressed in thousands of dollars or shares, except for per
share amounts.
Overview
We are a worldwide leader in childrens and family leisure
time and entertainment products and services, including the
design, manufacture and marketing of games and toys.
Internationally and in the United States, our widely recognized
core brands such as PLAYSKOOL, TRANSFORMERS, MY LITTLE PONY,
LITTLEST PET SHOP, TONKA, SUPER SOAKER, MILTON BRADLEY, PARKER
BROTHERS, TIGER and WIZARDS OF THE COAST provide what we believe
are the highest quality play experiences in the world. Our
offerings encompass a broad variety of games, including
traditional board, card, hand-held electronic, trading card,
roleplaying, plug and play and DVD games, as well as electronic
learning aids and puzzles. Toy offerings include boys
action figures, vehicles and playsets, girls toys,
electronic toys, plush products, preschool toys and infant
products, childrens consumer electronics, electronic
interactive products, creative play and toy related specialty
products. In addition, we license certain of our trademarks,
characters and other property rights to third parties for use in
connection with digital games, consumer promotions, and for the
sale of non-competing toys and games and non-toy products.
Organizationally, our principal segments are North America and
International. Both of these segments engage in the development,
marketing and selling of various toy and game products as listed
above. Our North American segment covers the United States,
Canada and Mexico while the International segment primarily
includes Europe, the Asia Pacific region and Latin and South
America (excluding Mexico). Financial information with respect
to our segments and geographic areas is included in note 15
to our financial statements, which are included in Item 8
of this
Form 10-K.
In addition, our Global Operations segment is responsible for
arranging product manufacturing and sourcing for the North
American and International segments and our other segment
out-licenses our intellectual property to third parties on a
worldwide basis.
North
America
The North American segments strategy in 2007 continued to
be based on growing core brands through innovation and
reinvention, introducing new initiatives driven by consumer and
marketplace insights and leveraging opportunistic toy and game
lines and licenses. Major 2007 brands and products included
TRANSFORMERS, LITTLEST PET SHOP, MARVEL products, PLAYSKOOL,
STAR WARS, NERF, MONOPOLY, FURREAL FRIENDS, MAGIC: THE
GATHERING, PLAY-DOH, BABY ALIVE and MY LITTLE PONY. In the North
American segment, our products are organized into the following
categories: (i) games and puzzles; (ii) boys
toys; (iii) girls toys; (iv) preschool toys;
(v) tween toys; and (vi) other.
Our games and puzzles category includes several well known
brands, including MILTON BRADLEY, PARKER BROTHERS, TIGER GAMES,
AVALON HILL and WIZARDS OF THE COAST. The MILTON BRADLEY, PARKER
BROTHERS, TIGER GAMES and AVALON HILL brand portfolios consist
of a broad assortment of games for children, tweens, families
and adults. Core game brands include MONOPOLY, BATTLESHIP, GAME
OF LIFE, SCRABBLE, CHUTES AND LADDERS, CANDY LAND, TROUBLE,
MOUSETRAP, OPERATION, HUNGRY HUNGRY HIPPOS, CONNECT FOUR,
TWISTER, YAHTZEE, JENGA, SIMON, CLUE, SORRY!, RISK, BOGGLE and
TRIVIAL PURSUIT, as well as a line of jigsaw puzzles for
children and adults, including BIG BEN and CROXLEY, as well as
the PUZZ-3D line. WIZARDS OF THE COAST offers a variety of
trading card and roleplaying games, including MAGIC: THE
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GATHERING and DUNGEONS & DRAGONS. We seek to keep our
core brands relevant through sustained marketing programs as
well as by offering consumers new ways to experience them. In
2008, we will seek to continue to expand our core brand
portfolio by introducing a PLAYSKOOL line of games that will
leverage our existing preschool consumer insights. In addition,
we will seek to continue to incorporate technology into our
existing game brands to align with current consumer interests.
In 2007, the Company introduced the MONOPOLY ELECTRONIC BANKING
edition, which allowed for faster, more intense game play. In
2008, the Company plans to introduce a customizable version of
TRIVIAL PURSUIT. In January of 2008, the Company acquired
Cranium, Inc., which develops and markets a wide range of
CRANIUM branded games and related products.
Our boys toys include a wide range of core brands such as
G.I. JOE and TRANSFORMERS action figures and accessories as well
as entertainment-based licensed products based on popular movie
and television characters, such as STAR WARS and MARVEL toys and
accessories. In the action figure area, a key part of our
strategy focuses on the importance of reinforcing the storyline
associated with these products through the use of media-based
entertainment. In 2007, sales in our boys toys category
benefited from major motion picture releases of SPIDER-MAN 3 in
May of 2007 and TRANSFORMERS in July of 2007. In 2008,
SPIDER-MAN and TRANSFORMERS products are expected to be
supported by animated television series. The STAR WARS product
line is expected to be supported in 2008 by the release of
animated television programming as well as the release of an
animated motion picture. In addition, we will be introducing
products based on the expected major motion picture releases of
IRONMAN and HULK, two properties available under our MARVEL
license, and INDIANA JONES. In addition to marketing and
developing action figures for traditional play, the Company also
develops and markets products designed for collectors, which has
been a key component of the success of the STAR WARS brand.
In our girls toys category, we seek to provide a
traditional and wholesome play experience. Girls toys
include LITTLEST PET SHOP, MY LITTLE PONY, FURREAL FRIENDS and
BABY ALIVE brands. In 2008, we will seek to continue to grow and
update the LITTLEST PET SHOP brand by introducing the VIRTUAL
INTERACTIVE PET segment which includes a plush doll that will
allow the consumer access to a website to digitally customize
their pets as well as access to games and other features. We
also plan to reintroduce a redesigned EASY-BAKE oven.
Our preschool toys category encompasses a range of products for
infants and preschoolers in the various stages of development.
Our preschool products include a portfolio of core brands
marketed primarily under the PLAYSKOOL trademark. The PLAYSKOOL
line includes such well-known products as MR. POTATO HEAD,
WEEBLES, SIT N SPIN and GLOWORM, along with a successful
line of infant toys including STEP START WALK N RIDE,
2-IN-1 TUMMY TIME GYM and BUSY BALL POPPER. Through our
AGES & STAGES system, we seek to provide consumer
friendly information that assists parents in understanding the
developmental milestones their children will encounter as well
as the role each PLAYSKOOL product can play in helping children
to achieve these developmental milestones. In addition, our
preschool category also includes the TONKA line of trucks and
interactive toys and the PLAY-DOH brand.
Our tweens toys category generally markets products under the
TIGER ELECTRONICS and NERF brands and seeks to target those
children who have outgrown traditional toys. The age group
targeted by this category is generally 8 to 12 years old.
In recent years, we have used our consumer insights and
electronic innovation to develop a strong line of products
focusing on this target audience. Our major tweens toys product
lines in 2007 included NERF, I-DOG and the POWER TOUR GUITAR. As
demonstrated through our I-DOG product, an interactive pet that
acts as an accessory to an MP3 player, we seek to draw on the
popularity of electronic trends in our tween product offerings.
International
In addition to our business in the United States, Mexico and
Canada, in 2007 we operated in more than 20 other countries,
selling a representative range of the toy and game products
marketed in the North American segment as discussed above,
together with some items that are sold only internationally. The
major geographic regions included in the International segment
are Europe, Asia Pacific and Latin and South America. In
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addition to growing core brands and leveraging opportunistic toy
lines and licenses, we seek to grow our international business
by continuing to expand into Eastern Europe and emerging markets
in Asia and Latin and South America. Key international brands
for 2007 included TRANSFORMERS, LITTLEST PET SHOP, MONOPOLY,
MARVEL, MY LITTLE PONY, and PLAYSKOOL.
Other
Segments
In our Global Operations segment, we manufacture and source
production of substantially all of our toy and game products.
The Company owns and operates manufacturing facilities in East
Longmeadow, Massachusetts and Waterford, Ireland. Sourcing of
our other production is done through unrelated manufacturers in
various Far East countries, principally China, using a Hong Kong
based wholly-owned subsidiary operation for quality control and
order coordination purposes. See Manufacturing and
Importing below for more details concerning overseas
manufacturing and sourcing.
Through our other segment we generate revenue through the
out-licensing worldwide of certain of our intellectual
properties to third parties for promotional and merchandising
uses in businesses which do not compete directly with our own
product offerings. During 2007, our Hasbro Products Group
out-licensed our brands primarily in apparel, publishing, home
goods and electronics, and certain brands in the digital area.
One of the primary goals of our licensing segment is to further
expand our brands into the digital world through strategic
licenses. As an example, in 2007 the Company entered into a
long-term strategic licensing alliance with Electronic Arts Inc.
(EA), which provides EA with the exclusive worldwide
rights to create digital games for all platforms, including
mobile phones, personal computers, and game consoles such as
XBOX, PLAYSTATION and WII, based on most of our toy and game
intellectual properties. The first games generated under this
strategic alliance are expected to be introduced in 2008.
Other
Information
To further extend our range of products in the various segments
of our business, we sell our toy and game products directly to
retailers, primarily on a direct import basis from the Far East.
These sales are reflected in the revenue of the related segment
where the customer resides.
Certain of our products are licensed to other companies for sale
in selected countries where we do not otherwise have a direct
business presence.
During the 2007 fiscal year, revenues generated from the sale of
TRANSFORMERS products were approximately $482,000, which was
12.6% of our consolidated net revenues in 2007. During the 2005
fiscal year, revenues generated from the sale of STAR WARS
products produced under our license with Lucas Licensing and
Lucasfilm were approximately $494,000, which was 16% of our
consolidated net revenues in 2005. No other line of products
constituted 10% or more of our consolidated net revenues in 2007
or 2005. No individual line of products accounted for 10% or
more of our consolidated net revenues during our 2006 fiscal
year.
Working
Capital Requirements
Our working capital needs are primarily financed through cash
generated from operations and, when necessary, proceeds from our
accounts receivable securitization program and short-term
borrowings. Our borrowings and the use of our accounts
receivable program generally reach peak levels during the fourth
quarter of each year. This corresponds to the time of year when
our receivables also generally reach peak levels as part of the
production and shipment of product in preparation for the
holiday shipping season. The strategy of retailers has been to
make a higher percentage of their purchases of toy and game
products within or close to the fourth quarter holiday consumer
buying season, which includes Christmas. We expect that
retailers will continue to follow this strategy. Our historical
revenue pattern is one in which the second half of the year is
more significant to our overall business than the first half
and, within the second half of the year, the fourth quarter is
more predominant. In 2007, the second half of the year accounted
for approximately 66% of full year revenues with the third and
fourth quarters accounting for 32% and 34% of full year
revenues, respectively. In years where the Company has products
tied to a major motion picture release, such as in 2007
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with the mid-year releases of SPIDER-MAN 3 and TRANSFORMERS and
in 2005 with the mid-year release of STAR WARS III: REVENGE OF
THE SITH, this concentration is not as pronounced due to the
higher level of sales that occur around and just prior to the
time of the motion picture theatrical release.
The toy and game business is also characterized by customer
order patterns which vary from year to year largely because of
differences each year in the degree of consumer acceptance of
product lines, product availability, marketing strategies and
inventory policies of retailers, the dates of theatrical
releases of major motion pictures for which we have product
licenses, and changes in overall economic conditions. As a
result, comparisons of our unshipped orders on any date with
those at the same date in a prior year are not necessarily
indicative of our sales for that year. Moreover, quick response
inventory management practices result in fewer orders being
placed significantly in advance of shipment and more orders
being placed for immediate delivery. Retailers are timing their
orders so that they are being filled by suppliers, such as us,
closer to the time of purchase by consumers. Unshipped orders at
January 27, 2008 and January 28, 2007 were
approximately $149,000 and $192,000, respectively. It is a
general industry practice that orders are subject to amendment
or cancellation by customers prior to shipment. The backlog of
unshipped orders at any date in a given year can also be
affected by programs that we may employ to incent customers to
place orders and accept shipments early in the year. These
programs follow general industry practices. The programs that we
plan to employ to promote sales in 2008 are substantially the
same as those we employed in 2007.
Historically, we commit to the majority of our inventory
production and advertising and marketing expenditures for a
given year prior to the peak third and fourth quarter retail
selling season. Our accounts receivable increase during the
third and fourth quarter as customers increase their purchases
to meet expected consumer demand in the holiday season. Due to
the concentrated timeframe of this selling period, payments for
these accounts receivable are generally not due until later in
the fourth quarter or early in the first quarter of the
subsequent year. The timing difference between expenses paid and
revenues collected sometimes makes it necessary for us to borrow
varying amounts during the year. During 2007, we utilized cash
from our operations, proceeds from our accounts receivable
securitization program, and borrowings under our secured amended
and restated revolving credit agreement as well as our
uncommitted lines of credit to meet our cash flow requirements.
In addition to the above sources of cash, in September 2007, we
issued $350,000 of notes that are due in 2017 (the
Notes). The proceeds from the Notes were primarily
used to repay our short-term borrowings while the remainder of
the proceeds were used for general corporate purposes.
Royalties,
Research and Development
Our success is dependent on innovation through the continuing
development of new products and the redesign of existing
products for continued market acceptance. In 2007, 2006, and
2005, we spent $167,194, $171,358, and $150,586, respectively,
on activities relating to the development, design and
engineering of new products and their packaging (including
products brought to us by independent designers) and on the
improvement or modification of ongoing products. Much of this
work is performed by our internal staff of designers, artists,
model makers and engineers.
In addition to the design and development work performed by our
own staff, we deal with a number of independent toy and game
designers for whose designs and ideas we compete with other toy
and game manufacturers. Rights to such designs and ideas, when
acquired by us, are usually exclusive and the agreements require
us to pay the designer a royalty on our net sales of the item.
These designer royalty agreements, in some cases, also provide
for advance royalties and minimum guarantees.
We also produce a number of toys and games under trademarks and
copyrights utilizing the names or likenesses of characters from
movies, television shows and other entertainment media, for
whose rights we compete with other toy and game manufacturers.
Licensing fees for these rights are generally paid as a royalty
on our net sales of the item. Licenses for the use of characters
are generally exclusive for specific products or product lines
in specified territories. In many instances, advance royalties
and minimum guarantees are required by these license agreements.
In 2007, 2006, and 2005, we incurred $316,807, $169,731, and
$247,283, respectively, of royalty expense. A portion of this
expense relates to amounts paid in prior years as royalty
advances. Our royalty expenses in any given year vary depending
upon the timing of movie releases
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and other entertainment. Royalty expense in 2007 and 2005 was
more significant in those years due to the release of SPIDER-MAN
3 and TRANSFORMERS in 2007 and STAR WARS EPISODE III: REVENGE OF
THE SITH in 2005 and the corresponding increases in sales of the
related products in those years.
Marketing
and Sales
Our products are sold nationally and internationally to a broad
spectrum of customers, including wholesalers, distributors,
chain stores, discount stores, mail order houses, catalog
stores, department stores and other traditional retailers, large
and small, as well as internet-based
e-tailers.
Our own sales forces account for the majority of sales of our
products. Remaining sales are generated by independent
distributors who sell our products, for the most part, in areas
of the world where we do not otherwise maintain a direct
presence. While we have thousands of customers, including over
2,000 in the United States during 2007, there has been
significant consolidation at the retail level over the last
several years in our industry, which we expect to continue. As a
result, the majority of our sales are to large chain stores,
distributors and wholesalers. While the consolidation of
customers provides us with certain benefits, such as potentially
more efficient product distribution and other decreased costs of
sales and distribution, this consolidation also creates
additional risks to our business associated with a major
customer having financial difficulties or reducing its business
with us. In addition, customer concentration may decrease the
prices we are able to obtain for some of our products and reduce
the number of products we would otherwise be able to bring to
market. During 2007, sales to our three largest customers,
Wal-Mart Stores, Inc., Target Corporation and Toys R
Us, Inc., represented 24%, 12% and 11%, respectively, of
consolidated net revenues, and sales to our top five customers,
including
Wal-Mart,
Target and Toys R Us, Inc., accounted for
approximately 52% of our consolidated net revenues. In the North
American segment, approximately 70% of the net revenues of the
segment were derived from our top three customers.
We advertise many of our toy and game products extensively on
television. Generally our advertising highlights selected items
in our various product groups in a manner designed to promote
the sale of not only the selected item, but also other items we
offer in those product groups as well. We introduce many of our
new products to major customers during the year prior to the
year of introduction of such products for retail sale. In
addition, we showcase many of our new products in New York City
at the time of the American International Toy Fair in February,
as well as at other international toy shows.
In 2007 we spent $434,742 on advertising, promotion and
marketing programs compared to $368,996 in 2006 and $366,371 in
2005.
Manufacturing
and Importing
During 2007 substantially all of our products were manufactured
in third party facilities in the Far East, primarily China, as
well as in our two owned facilities located in East Longmeadow,
Massachusetts and Waterford, Ireland.
Most of our products are manufactured from basic raw materials
such as plastic, paper and cardboard, although certain products
also make use of electronic components. All of these materials
are readily available but may be subject to significant
fluctuations in price. We generally enter into agreements with
suppliers at the beginning of a fiscal year that establish
prices for that year. For this reason, we are generally
insulated, in the short-term, from increases in the prices of
raw materials. However, severe increases in the prices of any of
these materials may require renegotiation with our suppliers
during the year. Our manufacturing processes and those of our
vendors include injection molding, blow molding, spray painting,
printing, box making and assembly. We purchase most of the
components and accessories used in our toys and certain of the
components used in our games, as well as some finished items,
from manufacturers in the United States and in other countries.
However, the countries of the Far East, and particularly the
Peoples Republic of China, constitute the largest
manufacturing center of toys in the world and the substantial
majority of our toy products are manufactured in China. The 1996
implementation of the General Agreement on Tariffs and Trade
reduced or eliminated customs duties on many of the products
imported by us.
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We believe that the manufacturing capacity of our third party
manufacturers, together with our own facilities, as well as the
supply of components, accessories and completed products which
we purchase from unaffiliated manufacturers, are adequate to
meet the anticipated demand in 2008 for our products. Our
reliance on designated external sources of manufacturing could
be shifted, over a period of time, to alternative sources of
supply for our products, should such changes be necessary or
desirable. However, if we were to be prevented from obtaining
products from a substantial number of our current Far East
suppliers due to political, labor or other factors beyond our
control, our operations and our ability to obtain products would
be disrupted while alternative sources of product were secured.
The imposition of trade sanctions by the United States or the
European Union against a class of products imported by us from,
or the loss of normal trade relations status by, the
Peoples Republic of China could significantly disrupt our
operations and increase the cost of our products imported into
the United States or Europe.
We purchase dies and molds from independent United States and
international sources.
Competition
We are a worldwide leader in the design, manufacture and
marketing of games and toys, but our business is highly
competitive. We compete with several large toy and game
companies in our product categories, as well as many smaller
United States and international toy and game designers,
manufacturers and marketers. Competition is based primarily on
meeting consumer entertainment preferences and on the quality
and play value of our products. To a lesser extent, competition
is also based on product pricing.
In addition to contending with competition from other toy and
game companies, in our business we must deal with the phenomena
that many children have been moving away from traditional toys
and games at a younger age. We refer to this as children
getting older younger. As a result, our products not only
compete with the offerings of other toy and game manufacturers,
but we must compete, particularly in meeting the demands of
older children, with the entertainment offerings of many other
companies, such as makers of video games and consumer electronic
products.
The volatility in consumer preferences with respect to family
entertainment and low barriers to entry continually create new
opportunities for existing competitors and
start-ups to
develop products which compete with our toy and game offerings.
Employees
At December 30, 2007, we employed approximately
5,900 persons worldwide, approximately 3,300 of whom were
located in the United States.
Trademarks,
Copyrights and Patents
We seek to protect our products, for the most part, and in as
many countries as practical, through registered trademarks,
copyrights and patents to the extent that such protection is
available, cost effective, and meaningful. The loss of such
rights concerning any particular product is unlikely to result
in significant harm to our business, although the loss of such
protection for a number of significant items might have such an
effect.
Government
Regulation
Our toy and game products sold in the United States are subject
to the provisions of The Consumer Product Safety Act (the
CPSA), The Federal Hazardous Substances Act (the
FHSA), The Flammable Fabrics Act (the
FFA), and the regulations promulgated thereunder. In
addition, certain of our products, such as the mixes for our
EASY-BAKE ovens, are also subject to regulation by the Food and
Drug Administration.
The CPSA empowers the Consumer Product Safety Commission (the
CPSC) to take action against hazards presented by
consumer products, including the formulation and implementation
of regulations and uniform safety standards. The CPSC has the
authority to seek to declare a product a banned hazardous
substance under the CPSA and to ban it from commerce. The
CPSC can file an action to seize and condemn
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an imminently hazardous consumer product under the
CPSA and may also order equitable remedies such as recall,
replacement, repair or refund for the product. The FHSA provides
for the repurchase by the manufacturer of articles that are
banned.
Consumer product safety laws also exist in some states and
cities within the United States and in Canada, Australia and
Europe. We utilize laboratories that employ testing and other
procedures intended to maintain compliance with the CPSA, the
FHSA, the FFA, international standards, and our own standards.
Notwithstanding the foregoing, there can be no assurance that
our products are or will be hazard free. Any material product
recall could have an adverse effect on our results of operations
or financial condition, depending on the product and scope of
the recall, and could negatively affect sales of our other
products as well.
The Childrens Television Act of 1990 and the rules
promulgated thereunder by the United States Federal
Communications Commission, as well as the laws of certain
foreign countries, place limitations on television commercials
during childrens programming.
We maintain programs to comply with various United States
federal, state, local and international requirements relating to
the environment, plant safety and other matters.
Financial
Information About International and United States
Operations
The information required by this item is included in
note 15 of the Notes to Consolidated Financial Statements
included in Item 8 of Part II of this report and is
incorporated herein by reference.
Availability
of Information
Our internet address is
http://www.hasbro.com.
We make our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, available free of charge on or through our website as soon
as reasonably practicable after we electronically file such
material with, or furnish it to, the Securities and Exchange
Commission.
Forward-Looking
Information and Risk Factors That May Affect Future
Results
From time to time, including in this Annual Report on
Form 10-K
and in our annual report to shareholders, we publish
forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These
forward-looking statements may relate to such
matters as our anticipated financial performance or business
prospects in future periods, expected technological and product
developments, the expected timing of new product introductions
or our expectations concerning the future acceptance of products
by customers, the timing of entertainment releases, marketing
and promotional efforts, research and development activities,
liquidity, and similar matters. Forward-looking statements are
inherently subject to risks and uncertainties. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements. These statements may be
identified by the use of forward-looking words or phrases such
as anticipate, believe,
could, expect, intend,
looking forward, may,
planned, potential, should,
will and would or any variations of
words with similar meanings. We note that a variety of factors
could cause our actual results and experience to differ
materially from the anticipated results or other expectations
expressed or anticipated in our forward-looking statements. The
factors listed below are illustrative and other risks and
uncertainties may arise as are or may be detailed from time to
time in our public announcements and our filings with the
Securities and Exchange Commission, such as on
Forms 8-K,
10-Q and
10-K. We
undertake no obligation to make any revisions to the
forward-looking statements contained in this Annual Report on
Form 10-K
or in our annual report to shareholders to reflect events or
circumstances occurring after the date of the filing of this
report. Unless otherwise specifically indicated, all dollar or
share amounts herein are expressed in thousands of dollars or
shares, except for per share amounts.
7
The
volatility of consumer preferences, combined with the high level
of competition and low barriers to entry in the family
entertainment industry make it difficult to maintain the success
of existing products and product lines or consistently introduce
successful new products. In addition, an inability to develop
and introduce planned new products and product lines in a timely
and cost-effective manner may damage our business.
The family entertainment business is a fashion industry. Our
success is critically dependent upon the consumer appeal of our
products, principally games and toys. Our failure to
successfully anticipate, identify and react to childrens
interests and the current preferences in family entertainment
could significantly lower sales of our products and harm our
sales and profitability.
A decline in the popularity of our existing products and product
lines, or the failure of our new products and product lines to
achieve and sustain market acceptance with retailers and
consumers, could significantly lower our sales and operating
margins, which would in turn harm our profitability, business
and financial condition. In our industry, it is important to
identify and offer what are considered to be the hot
toys and games on childrens wish lists. Our
continued success will depend on our ability to develop, market
and sell popular toys, games and childrens electronic
products which are sought after by both children and their
parents. We seek to achieve and maintain market popularity for
our products through the redesign and extension of our existing
family entertainment properties in ways we believe will capture
evolving consumer interest and imagination and remain relevant
in todays world, and by developing, introducing and
gaining customer interest for new family entertainment products.
This process involves anticipating and extending successful play
patterns and identifying entertainment concepts and properties
that appeal to childrens imaginations. However, consumer
preferences with respect to family entertainment are
continuously changing and are difficult to anticipate. Evolving
consumer tastes, coupled with an ever changing pipeline of
entertainment properties and products which compete for consumer
interest and acceptance, creates an environment in which
products can be extremely popular during a certain period in
time but then rapidly be replaced in consumers minds with
other properties. As a result, individual family entertainment
products and properties generally, and high technology products
in particular, often have short consumer life cycles.
Not only must we address rapidly changing consumer tastes and
interests but we face competitors who are also constantly
monitoring consumer tastes, seeking ideas which will appeal to
consumers and introducing new products that compete with our
products for consumer purchasing. In addition to existing
competitors, the barriers to entry for new participants in the
family entertainment industry are low. New participants with a
popular product idea or property can gain access to consumers
and become a significant source of competition for our products.
In some cases our competitors products may achieve greater
market acceptance than our products and potentially reduce
demand for our products.
The challenge of developing and offering products that are
sought after by children is compounded by the trend of children
getting older younger. By this we mean that children
are losing interest in traditional toys and games at younger
ages and, as a result, at younger and younger ages, our products
compete with the offerings of video game suppliers, consumer
electronics companies and other businesses outside of the
traditional toy and game industry.
In addition to designing and developing products based on our
own brands, we seek to fulfill consumer preferences and
interests by producing products based on popular entertainment
properties developed by other parties and licensed to us. The
success of entertainment properties released theatrically for
which we have a license, such as MARVEL or STAR WARS related
products, can significantly affect our revenues and
profitability. If we produce a line of products based on a movie
or television series, the success of the movie or series has a
critical impact on the level of consumer interest in the
associated products we are offering. In addition, competition in
our industry for access to entertainment properties can lessen
our ability to secure, maintain, and renew popular licenses to
entertainment products on beneficial terms, if at all, and to
attract and retain the talented employees necessary to design,
develop and market successful products based on these
properties. The loss of rights granted pursuant to any of our
licensing agreements could harm our business and competitive
position.
8
There is no guarantee that:
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Any of our current products or product lines will continue to be
popular;
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Any property for which we have a significant license will
achieve or sustain popularity;
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Any new products or product lines we introduce will be
considered interesting to consumers and achieve an adequate
market acceptance;
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Any new products life cycle will be sufficient to permit
us to profitably recover development, manufacturing, marketing,
royalties (including royalty advances and guarantees) and other
costs of producing and selling the product; or
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We will be able to manufacture, source and ship new or
continuing products in a timely and cost-effective basis to meet
constantly changing consumer demands, a risk that is heightened
by our customers compressed shipping schedules and the
seasonality of our business.
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In developing new products and product lines, we have
anticipated dates for the associated product introductions. When
we state that we will introduce, or anticipate introducing, a
particular product or product line at a certain time in the
future those expectations are based on completing the associated
development and implementation work in accordance with our
currently anticipated development schedule. Unforeseen delays or
difficulties in the development process, or significant
increases in the planned cost of development, may cause the
introduction date for products to be later than anticipated or,
in some situations, may cause a product introduction to be
discontinued. Similarly, the success of our products is often
dependent on the timelines and effectiveness of related
advertising and media efforts. Television programming, movie and
DVD releases, comic book releases, and other media efforts are
often critical in generating interest in our products. Not only
our efforts, but the efforts of third parties, heavily impact
the launch dates and success of these media efforts. When we say
that products or brands will be supported by certain media
releases, those statements are based on our current plans and
expectations. Unforeseen factors may delay these media releases
or even lead to their cancellation. Any delay or cancellation of
planned product development work, introductions, or media
support may decrease the number of products we sell and harm our
business.
Our
business is seasonal and therefore our annual operating results
will depend, in large part, on our sales during the relatively
brief holiday shopping season. This seasonality is exacerbated
as retailers become more efficient in their control of inventory
levels through quick response inventory management
techniques.
Sales of our family entertainment products at retail are
extremely seasonal, with a majority of retail sales occurring
during the period from September through December in
anticipation of the holiday season, including Christmas. This
seasonality has increased over time, as retailers become more
efficient in their control of inventory levels through quick
response inventory management techniques. These customers are
timing their orders so that they are being filled by suppliers,
such as us, closer to the time of purchase by consumers. For
toys, games and other family entertainment products which we
produce, a majority of retail sales for the entire year occur in
the fourth quarter, close to the holiday season. As a
consequence, the majority of our sales to our customers occur in
the period from September through December, as our customers do
not want to maintain large on-hand inventories throughout the
year ahead of consumer demand. While these techniques reduce a
retailers investment in inventory, they increase pressure
on suppliers like us to fill orders promptly and thereby shift a
significant portion of inventory risk and carrying costs to the
supplier.
The limited inventory carried by retailers may also reduce or
delay retail sales, resulting in lower revenues for us. If we or
our customers determine that one of our products is more popular
at retail than was originally anticipated, we may not have
sufficient time to produce and ship enough additional product to
fully capture consumer interest in the product. Additionally,
the logistics of supplying more and more product within shorter
time periods increases the risk that we will fail to achieve
tight and compressed shipping schedules, which also may reduce
our sales and harm our financial performance. This seasonal
pattern requires significant use of working capital, mainly to
manufacture or acquire inventory during the portion of the year
prior to the holiday season, and requires accurate forecasting
of demand for products during the holiday season
9
in order to avoid losing potential sales of popular products or
producing excess inventory of products that are less popular
with consumers. Our failure to accurately predict and respond to
consumer demand, resulting in our underproducing popular items
and/or
overproducing less popular items, would reduce our total sales
and harm our results of operations. In addition, as a result of
the seasonal nature of our business, we would be significantly
and adversely affected, in a manner disproportionate to the
impact on a company with sales spread more evenly throughout the
year, by unforeseen events, such as a terrorist attack or
economic shock, that harm the retail environment or consumer
buying patterns during our key selling season, or by events,
such as strikes or port delays, that interfere with the shipment
of goods, particularly from the Far East, during the critical
months leading up to the holiday purchasing season.
The
consolidation of our retail customer base means that economic
difficulties or changes in the purchasing policies of our major
customers could have a significant impact on us.
We depend upon a relatively small retail customer base to sell
the majority of our products. For the fiscal year ended
December 30, 2007, Wal-Mart Stores, Inc., Target
Corporation, and Toys R Us, Inc., accounted for
approximately 24%, 12% and 11%, respectively, of our
consolidated net revenues and our five largest customers,
including Wal-Mart, Target and Toys R Us, in the
aggregate accounted for approximately 52% of our consolidated
net revenues. In the North American segment, approximately 70%
of the net revenues of the segment were derived from our top
three customers. While the consolidation of our customer base
may provide certain benefits to us, such as potentially more
efficient product distribution and other decreased costs of
sales and distribution, this consolidation also means that if
one or more of our major customers were to experience
difficulties in fulfilling their obligations to us, cease doing
business with us, significantly reduce the amount of their
purchases from us or return substantial amounts of our products,
it could harm our sales, profitability and financial condition.
Increased concentration among our customers could also
negatively impact our ability to negotiate higher sales prices
for our products and could result in lower gross margins than
would otherwise be obtained if there were less consolidation
among our customers. In addition, the bankruptcy or other lack
of success of one or more of our significant retail customers
could negatively impact our revenues and bad debt expense.
We may
not realize the full benefit of our licenses if the licensed
material has less market appeal than expected or if sales
revenue from the licensed products is not sufficient to earn out
the minimum guaranteed royalties.
An important part of our business involves obtaining licenses to
produce products based on various entertainment properties and
theatrical releases, such as those based upon MARVEL or STAR
WARS characters. The license agreements we enter to obtain these
rights usually require us to pay minimum royalty guarantees that
may be substantial, and in some cases may be greater than what
we are ultimately able to recoup from actual sales, which could
result in write-offs of significant amounts which in turn would
harm our results of operations. At December 30, 2007, we
had $137,959 of prepaid royalties, $94,616 of which are included
in prepaid expenses and other current assets and $43,343 of
which are included in other assets. Under the terms of existing
contracts as of December 30, 2007, we may be required to
pay future minimum guaranteed royalties and other licensing fees
totaling approximately $87,815. Acquiring or renewing licenses
may require the payment of minimum guaranteed royalties that we
consider to be too high to be profitable, which may result in
losing licenses we currently hold when they become available for
renewal, or missing business opportunities for new licenses.
Additionally, as a licensee of entertainment based properties we
have no guaranty that a particular property or brand will
translate into successful toy or game products.
We anticipate that the shorter theatrical duration for movie
releases will make it increasingly difficult for us to
profitably sell licensed products based on entertainment
properties and may lead our customers to reduce their demand for
these products in order to minimize their inventory risk.
Furthermore, there can be no assurance that a successful brand
will continue to be successful or maintain a high level of sales
in the future, as new entertainment properties and competitive
products are continually being introduced to the market. In the
event that we are not able to acquire or maintain successful
entertainment licenses on advantageous terms, our revenues and
profits may be harmed.
10
Our
use of third-party manufacturers to produce the majority of our
toy products, as well as certain other products, presents risks
to our business.
We own and operate two game and puzzle manufacturing facilities,
one in East Longmeadow, Massachusetts and the other in
Waterford, Ireland. However, most of our toy products, in
addition to certain other products, are manufactured by
third-party manufacturers, most of whom are located in the
Peoples Republic of China. Although our external sources
of manufacturing can be shifted, over a period of time, to
alternative sources of supply, should such changes be necessary,
if we were prevented or delayed in obtaining products or
components for a material portion of our product line due to
political, labor or other factors beyond our control, our
operations would be disrupted, potentially for a significant
period of time, while alternative sources of supply were
secured. This delay could significantly reduce our sales and
profitability, and harm our business.
Given that the majority of our manufacturing is conducted by
third-party manufacturers located in the Peoples Republic
of China, health conditions and other factors affecting social
and economic activity in China and affecting the movement of
people and products into and from China to our major markets,
including North America and Europe, as well as increases in the
costs of labor and other costs of doing business in China, could
have a significant negative impact on our operations, revenues
and earnings. Factors that could negatively affect our business
include a potential significant revaluation of the Chinese yuan,
which may result in an increase in the cost of producing
products in China, increases in labor costs and difficulties in
moving products manufactured in the Far East out of the Far East
and through the ports on the western coast of
North America, whether due to port congestion, labor
disputes, product regulations and/or inspections or other
factors. Also, the imposition of trade sanctions or other
regulations by the United States or the European Union against
products imported by us from, or the loss of normal trade
relations status with, the Peoples Republic of
China, could significantly increase our cost of products
imported into the United States or Europe and harm our business.
Additionally, the suspension of the operations of a third party
manufacturer by government inspectors in China could result in
delays to us in obtaining product and may harm sales.
We require our third-party manufacturers to comply with our
Global Business Ethics Principles, which are designed to prevent
products manufactured by or for us from being produced under
inhumane or exploitive conditions. The Global Business Ethics
Principles address a number of issues, including working hours
and compensation, health and safety, and abuse and
discrimination. In addition, Hasbro requires that our products
supplied by third-party manufacturers be produced in compliance
with all applicable laws and regulations, including consumer and
product safety laws in the markets where those products are
sold. Hasbro has the right, both directly and through the use of
outside monitors, to monitor compliance by our third-party
manufacturers with our Global Business Ethics Principles and
other manufacturing requirements. In addition, we do quality
assurance testing on our products, including products
manufactured for us by third parties. Notwithstanding these
requirements and our monitoring and testing of compliance with
them, there is always a risk that one or more of our third-party
manufacturers will not comply with our requirements and that we
will not immediately discover such non-compliance. Any failure
of our third-party manufacturers to comply with labor, consumer,
product safety or other applicable requirements in manufacturing
products for us could result in damage to our reputation, harm
sales of our products and potentially create liability for us.
Our
substantial sales and manufacturing operations outside the
United States subject us to risks associated with international
operations.
We operate facilities and sell products in numerous countries
outside the United States. For the year ended December 30,
2007, our net revenues from international customers comprised
approximately 42% of our total consolidated net revenues. We
expect our sales to international customers to continue to
account for a significant portion of our revenues. Additionally,
as we discussed above, we utilize third-party manufacturers
located principally in the Far East, to produce the majority of
our products, and we have a manufacturing facility in Ireland.
These sales and manufacturing operations are subject to the
risks associated with international operations, including:
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Currency conversion risks and currency fluctuations;
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Limitations, including taxes, on the repatriation of earnings;
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11
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Political instability, civil unrest and economic instability;
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Greater difficulty enforcing intellectual property rights and
weaker laws protecting such rights;
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Complications in complying with different laws in varying
jurisdictions, which laws may dictate that certain practices
which are acceptable in some jurisdictions are not acceptable in
others, and changes in governmental policies;
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Natural disasters and the greater difficulty and expense in
recovering therefrom;
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Difficulties in moving materials and products from one country
to another, including port congestion, strikes and other
transportation delays and interruptions;
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Changes in international labor costs and other costs of doing
business internationally; and
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The imposition of tariffs.
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Because of the importance of our international sales and
international sourcing of manufacturing to our business, our
financial condition and results of operations could be
significantly harmed if any of the risks described above were to
occur.
Market
conditions, including commodity and fuel prices, public health
conditions and other third party conduct could negatively impact
our revenues, margins and our other business
initiatives.
Economic and public health conditions, including factors that
impact the strength of the retail market and retail demand, or
our ability to manufacture and deliver products in a timely and
cost-effective manner, can have a significant impact on our
business. The success of our family entertainment products is
dependent on consumer purchasing of those products. Consumers
may not purchase our products because the products do not
capture consumer interest and imagination or because competitor
family entertainment offerings are deemed more attractive. But
consumer spending on our products can also be harmed by factors
that negatively impact consumers budgets generally, and
which are not due to our product offerings.
Significant increases in the costs of other products which are
required by consumers, such as gasoline and home heating fuels,
may reduce household spending on discretionary entertainment
products we offer. In addition, weakened economic conditions,
lowered employment levels or recessions in any of our major
markets may significantly reduce purchases of our products.
Economic conditions may also be negatively impacted by terrorist
attacks, wars and other conflicts, increases in critical
commodity prices, or the prospect of such events. Such a
weakened economic and business climate, as well as consumer
uncertainty created by such a climate, could harm our sales and
profitability.
Our success and profitability not only depend on consumer demand
for our products, but also on our ability to produce and sell
those products at costs which allow for profitable sales. Rising
fuel and raw material prices, for components such as resin used
in plastics, increased transportation costs, and increased labor
costs in the markets in which our products are manufactured all
may increase our costs for producing and transporting our
products, which in turn may reduce our margins, reduce our
profitability and harm our business.
Other conditions, such as the unavailability of electrical
components, may impede our ability to manufacture, source and
ship new and continuing products on a timely basis. Additional
factors outside of our control could delay or increase the cost
of implementing our business initiatives and product plans or
alter our actions and reduce actual results. For example, work
stoppages, slowdowns or strikes, a severe public health pandemic
or the occurrence or threat of wars or other conflicts, could
impact our ability to manufacture or deliver product, resulting
in increased costs
and/or lost
sales for our products.
12
Part
of our strategy for remaining relevant to older children is to
offer innovative childrens toy and game electronic
products. The margins on many of these products are lower than
more traditional toys and games and such products may have a
shorter lifespan than more traditional toys and games. As a
result, increasing sales of childrens toy and game
electronic products may lower our overall operating margins and
produce more volatility in our business.
As children have grown older younger and have become
interested in more and more sophisticated and adult products,
such as videogames and consumer electronics, at younger and
younger ages, we have needed to work even harder to keep our
products relevant for these consumers. One initiative we have
been pursuing to capture the interest of older children is to
offer innovative childrens electronic toys and games.
Examples of such products in the last few years include
VIDEONOW, CHATNOW, ZOOMBOX, our I-branded products such as I-DOG
and I-CAT, and our FURREAL FRIENDS line of products, including
BUTTERSCOTCH. These products, if successful, can be an effective
way for us to connect with consumers and increase sales.
However, childrens electronics, in addition to the risks
associated with our other family entertainment products, also
face certain additional risks.
Our costs for designing, developing and producing electronic
products tend to be higher than for many of our other more
traditional products, such as board games and action figures.
The ability to recoup these higher costs through sufficient
sales quantities and to reflect higher costs in higher prices is
constrained by heavy competition in consumer electronics. As a
consequence, our margins on the sales of electronic products
tend to be lower than for more traditional products and we can
face increased risk of not achieving sales sufficient to recover
our costs. In addition, the pace of change in product offerings
and consumer tastes in the electronics area is potentially even
greater than for our other products. This pace of change means
that the window in which a product can achieve and maintain
consumer interest may be even shorter.
As a
manufacturer of consumer products and a large multinational
corporation, we are subject to various government regulations
and may be subject to additional regulations in the future,
violation of which could subject us to sanctions or otherwise
harm our business. In addition, we could be the subject of
future product liability suits or product recalls, which could
harm our business.
As a manufacturer of consumer products, we are subject to
significant government regulations, including, in the United
States, under The Consumer Products Safety Act, The Federal
Hazardous Substances Act, and The Flammable Fabrics Act, as well
as under product safety and consumer protection statutes in our
international markets. In addition, certain of our products are
subject to regulation by the Food and Drug Administration or
similar international authorities. While we take all the steps
we believe are necessary to comply with these acts, there can be
no assurance that we will be in compliance in the future.
Failure to comply could result in sanctions which could have a
negative impact on our business, financial condition and results
of operations. We may also be subject to involuntary product
recalls or may voluntarily conduct a product recall. While costs
associated with product recalls have generally not been material
to our business, the costs associated with future product
recalls individually and in the aggregate in any given fiscal
year, could be significant. In addition, any product recall,
regardless of direct costs of the recall, may harm consumer
perceptions of our products and have a negative impact on our
future sales and results of operations.
Governments and regulatory agencies in the markets where we
manufacture and sell products may enact additional regulations
relating to product safety and consumer protection in the
future, and may also increase the penalties for failure to
comply with product safety and consumer protection regulations.
In addition, one or more of our customers might require changes
in our products, such as the non-use of certain materials, in
the future. Complying with any such additional regulations or
requirements could impose increased costs on our business.
Similarly, increased penalties for non-compliance could subject
us to greater expense in the event any of our products were
found to not comply with such regulations. Such increased costs
or penalties could harm our business.
In addition to government regulation, products that have been or
may be developed by us may expose us to potential liability from
personal injury or property damage claims by the users of such
products. There can
13
be no assurance that a claim will not be brought against us in
the future. Any successful claim could significantly harm our
business, financial condition and results of operations.
As a large, multinational corporation, we are subject to a host
of governmental regulations throughout the world, including
antitrust, customs and tax requirements, anti-boycott
regulations and the Foreign Corrupt Practices Act. Our failure
to successfully comply with any such legal requirements could
subject us to monetary liabilities and other sanctions that
could harm our business and financial condition.
Our
business is dependent on intellectual property rights and we may
not be able to protect such rights successfully. In addition, we
have a material amount of acquired product rights which, if
impaired, would result in a reduction of our
income.
Our intellectual property, including our license agreements and
other agreements that establish our ownership rights and
maintain the confidentiality of our intellectual property, are
of great value. We rely on a combination of trade secret,
copyright, trademark, patent and other proprietary rights laws
to protect our rights to valuable intellectual property related
to our brands. From time to time, third parties have challenged,
and may in the future try to challenge, our ownership of our
intellectual property. In addition, our business is subject to
the risk of third parties counterfeiting our products or
infringing on our intellectual property rights. We may need to
resort to litigation to protect our intellectual property
rights, which could result in substantial costs and diversion of
resources. Our failure to protect our intellectual property
rights could harm our business and competitive position. Much of
our intellectual property has been internally developed and has
no carrying value on our balance sheet. As of December 30,
2007, we had approximately $486,232 of acquired product and
licensing rights included in other assets on our balance sheet.
Declines in the profitability of the acquired brands or licensed
products may impact our ability to recover the carrying value of
the related assets and could result in an impairment charge.
Reduction in our net income caused by impairment charges could
harm our financial results.
We may
not realize the anticipated benefits of future acquisitions or
those benefits may be delayed or reduced in their
realization.
Although we have not made any major acquisitions in the last few
years, acquisitions have been a significant part of our
historical growth and have enabled us to further broaden and
diversify our product offerings. In making acquisitions, we
target companies that we believe offer attractive family
entertainment products. However, we cannot be certain that the
products of companies we may acquire in the future will achieve
or maintain popularity with consumers. In some cases, we expect
that the integration of the product lines of the companies that
we acquire into our operations will create production, marketing
and other operating synergies which will produce greater revenue
growth and profitability and, where applicable, cost savings,
operating efficiencies and other advantages. However, we cannot
be certain that these synergies, efficiencies and cost savings
will be realized. Even if achieved, these benefits may be
delayed or reduced in their realization. In other cases, we
acquire companies that we believe have strong and creative
management, in which case we plan to operate them more
autonomously rather than fully integrating them into our
operations. We cannot be certain that the key talented
individuals at these companies will continue to work for us
after the acquisition or that they will continue to develop
popular and profitable products or services.
From
time to time, we are involved in litigation, arbitration or
regulatory matters where the outcome is uncertain and which
could entail significant expense.
As is the case with many large multinational corporations, we
are subject from time to time to regulatory investigations,
litigation and arbitration disputes. Because the outcome of
litigation, arbitration and regulatory investigations is
inherently difficult to predict, it is possible that the outcome
of any of these matters could entail significant expense for us
and harm our business. The fact that we operate in significant
numbers of international markets also increases the risk that we
may face legal and regulatory exposures as we attempt to comply
with a large number of varying legal and regulatory requirements.
14
We
rely on external financing, including our credit facilities and
accounts receivable securitization facility, to help fund our
operations. If we were unable to obtain or service such
financing, or if the restrictions imposed by such financing were
too burdensome, our business would be harmed.
Due to the seasonal nature of our business, in order to meet our
working capital needs, particularly those in the third and
fourth quarters, we rely on our revolving credit facility and
our other credit facilities for working capital. We currently
have a five-year revolving credit agreement, which provides for
a $300,000 committed revolving credit facility which provides
the Company the ability to request increases in the committed
facility in additional increments of $50,000, up to a total of
$500,000. The credit agreement contains certain restrictive
covenants setting forth leverage and coverage requirements, and
certain other limitations typical of an investment grade
facility. These restrictive covenants may limit our future
actions, and financial, operating and strategic flexibility. In
addition, our financial covenants were set at the time we
entered into our credit facility. Our performance and financial
condition may not meet our original expectations, causing us to
fail to meet such financial covenants. Non-compliance with our
debt covenants could result in us being unable to utilize
borrowings under our revolving credit facility and other bank
lines, a circumstance which potentially could occur when
operating shortfalls would most require supplementary borrowings
to enable us to continue to fund our operations.
As an additional source of working capital and liquidity, we
currently have a $250,000 accounts receivable securitization
program, which is increased to $300,000 for the period from
fiscal October through fiscal January. Under this program, we
sell on an ongoing basis, substantially all of our domestic
U.S. dollar denominated trade accounts receivable to a
bankruptcy remote special purpose entity. Under this facility,
the special purpose entity is able to sell, on a revolving
basis, undivided ownership interests in the eligible receivables
to bank conduits. During the term of the facility, we must
maintain certain performance ratios. If we fail to maintain
these ratios, we could be prevented from accessing this
cost-effective source of working capital and short-term
financing.
We believe that our cash flow from operations, together with our
cash on hand and access to existing credit facilities and our
accounts receivable securitization facility, are adequate for
current and planned needs in 2008. However, our actual
experience may differ from these expectations. Factors that may
lead to a difference include, but are not limited to, the
matters discussed herein, as well as future events that might
have the effect of reducing our available cash balance, such as
unexpected material operating losses or increased capital or
other expenditures, as well as increases in inventory or
accounts receivable that are ineligible for sale under our
securitization facility, or future events that may reduce or
eliminate the availability of external financial resources.
We also may choose to finance our capital needs, from time to
time, through the issuance of debt securities. Our ability to
issue such securities on satisfactory terms, if at all, will
depend on the state of our business and financial condition, any
ratings issued by major credit rating agencies, market interest
rates, and the overall condition of the financial and credit
markets at the time of the offering. The condition of the credit
markets and prevailing interest rates have fluctuated in the
past and are likely to fluctuate in the future. Variations in
these factors could make it difficult for us to sell debt
securities or require us to offer higher interest rates in order
to sell new debt securities. The failure to receive financing on
desirable terms, or at all, could damage our ability to support
our future operations or capital needs or engage in other
business activities.
As of December 30, 2007, we had $844,815 of total principal
amount of indebtedness outstanding, of which $135,092 is due in
July 2008. If we are unable to generate sufficient available
cash flow to service our outstanding debt we would need to
refinance such debt or face default. There is no guarantee that
we would be able to refinance debt on favorable terms, or at
all. This total indebtedness includes $249,828 in aggregate
principal amount of 2.75% senior convertible debentures
that we issued in 2001. On December 1, 2011 and
December 1, 2016, and upon the occurrence of certain
fundamental corporate changes, holders of the 2.75% senior
convertible debentures may require us to purchase their
debentures. At that time, the purchase price may be paid in
cash, shares of common stock or a combination of the two, at our
discretion, provided
15
that we will pay accrued and unpaid interest in cash. We may not
have sufficient cash at that time to make the required
repurchases and may be required to settle in shares of common
stock.
We
have a material amount of goodwill which, if it becomes
impaired, would result in a reduction in our net
income.
Goodwill is the amount by which the cost of an acquisition
accounted for using the purchase method exceeds the fair value
of the net assets we acquire. Current accounting standards
require that goodwill no longer be amortized but instead be
periodically evaluated for impairment based on the fair value of
the reporting unit. At December 30, 2007, approximately
$471,177 or 14.6%, of our total assets represented goodwill.
Declines in our profitability may impact the fair value of our
reporting units, which could result in a write-down of our
goodwill. Reductions in our net income caused by the write-down
of goodwill could harm our results of operations.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None
Hasbro owns its corporate headquarters in Pawtucket, Rhode
Island consisting of approximately 343,000 square feet,
which is used in the North American and Global Operations
segments as well as for corporate functions. The Company also
owns an adjacent building consisting of approximately
23,000 square feet that is used in the corporate function.
In addition, the Company leases a building in East Providence,
Rhode Island consisting of approximately 120,000 square
feet that is used in the corporate function as well as in the
Global Operations and other segments. In addition to the above
facilities, the Company also leases office space consisting of
approximately 95,400 square feet in Renton, Washington as
well as warehouse space aggregating approximately
1,151,000 square feet in California and Texas that are also
used in the North American segment. The North American segment
also has leased offices and warehouses in Canada and Mexico.
The Company owns two manufacturing plants in East Longmeadow,
Massachusetts and Waterford, Ireland. The East Longmeadow plant
consists of approximately 1,148,000 square feet as well as
a leased warehouse of approximately 500,000 square feet and
is used in the North American and Global Operations segments.
The Waterford plant consists of approximately
244,000 square feet and is used in our Global Operations
segment. The Global Operations segment also leases an aggregate
of 83,800 square feet of office and warehouse space in Hong
Kong used in this segment as well as approximately
52,300 square feet of office space leased in China.
In the International segment, the Company leases or owns
property in approximately 21 countries. The primary locations in
the International segment are in the United Kingdom, Germany,
France, Spain, Australia and Chile.
The above properties consist, in general, of brick, cinder block
or concrete block buildings which the Company believes are in
good condition and well maintained.
The Company believes that its facilities are adequate for its
needs. The Company believes that should it not be able to renew
any of the leases related to its leased facilities that it could
secure similar substitute properties without a material adverse
impact on its operations.
|
|
Item 3.
|
Legal
Proceedings
|
We are currently party to certain legal proceedings, none of
which, individually or in the aggregate, we believe to be
material to our financial condition.
16
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None.
Executive
Officers of the Registrant
The following persons are the executive officers of the Company.
Such executive officers are elected annually. The position(s)
and office(s) listed below are the principal position(s) and
office(s) held by such persons with the Company, or its
subsidiaries or divisions employing such person. The persons
listed below generally also serve as officers and directors of
certain of the Companys various subsidiaries at the
request and convenience of the Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
|
|
|
|
Serving in
|
|
|
|
|
|
|
Current
|
Name
|
|
Age
|
|
Position and Office Held
|
|
Position
|
|
Alfred J. Verrecchia(1)(7)
|
|
|
65
|
|
|
President and Chief Executive Officer
|
|
|
Since 2003
|
|
Brian Goldner(2)(7)
|
|
|
44
|
|
|
Chief Operating Officer
|
|
|
Since 2006
|
|
David D. R. Hargreaves(3)
|
|
|
55
|
|
|
Executive Vice President, Finance and Global Operations and
Chief Financial Officer
|
|
|
Since 2007
|
|
John Frascotti(4)
|
|
|
47
|
|
|
Global Chief Marketing Officer
|
|
|
Since 2008
|
|
Duncan Billing(5)
|
|
|
49
|
|
|
Global Development Officer
|
|
|
Since 2008
|
|
Barry Nagler
|
|
|
51
|
|
|
Senior Vice President, General Counsel and Secretary
|
|
|
Since 2001
|
|
Deborah Thomas Slater(6)
|
|
|
44
|
|
|
Senior Vice President and Controller
|
|
|
Since 2003
|
|
Martin R. Trueb
|
|
|
55
|
|
|
Senior Vice President and Treasurer
|
|
|
Since 1997
|
|
|
|
|
(1) |
|
Prior thereto, President and Chief Operating Officer from 2001
to 2003. |
|
(2) |
|
Prior thereto, President, U.S. Toys Segment from 2003 to 2006;
prior thereto, President, U.S. Toys, from 2001 to 2003. |
|
(3) |
|
Prior thereto, Senior Vice President and Chief Financial Officer
from 2001 to 2007. |
|
(4) |
|
Mr. Frascotti joined the Company in January 2008. Prior
thereto he was employed by Reebok International, Ltd., serving
as Senior Vice President, New Business, Acquisitions and
Licensing from 2002 to 2005, and as Senior Vice President,
Sports Division from 2005 to 2008. |
|
(5) |
|
Prior thereto, Chief Marketing Officer, U.S. Toy Group since
2004; prior thereto, General Manager, Big Kids Division,
since 2002. |
|
(6) |
|
Prior thereto, Vice President and Assistant Controller from 1998
to 2003. |
|
(7) |
|
Effective May 22, 2008, Mr. Verrecchia will step down
as President and Chief Executive Officer of the Company and
become the Chairman of the Companys Board of Directors.
Mr. Goldner will succeed Mr. Verrecchia as President
and Chief Executive Officer effective on that date. |
17
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
The Companys common stock, par value $.50 per share (the
Common Stock), is traded on the New York Stock
Exchange under the symbol HAS. The following table
sets forth the high and low sales prices as reported on the
Composite Tape of the New York Stock Exchange and the cash
dividends declared per share of Common Stock for the periods
listed.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Prices
|
|
|
Cash Dividends
|
|
Period
|
|
High
|
|
|
Low
|
|
|
Declared
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
$
|
30.24
|
|
|
|
27.04
|
|
|
$
|
.16
|
|
2nd Quarter
|
|
|
33.43
|
|
|
|
28.10
|
|
|
|
.16
|
|
3rd Quarter
|
|
|
33.49
|
|
|
|
25.25
|
|
|
|
.16
|
|
4th Quarter
|
|
|
30.68
|
|
|
|
25.25
|
|
|
|
.16
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
$
|
21.90
|
|
|
|
19.52
|
|
|
$
|
.12
|
|
2nd Quarter
|
|
|
21.27
|
|
|
|
17.90
|
|
|
|
.12
|
|
3rd Quarter
|
|
|
22.75
|
|
|
|
17.00
|
|
|
|
.12
|
|
4th Quarter
|
|
|
27.69
|
|
|
|
22.41
|
|
|
|
.12
|
|
The approximate number of holders of record of the
Companys Common Stock as of February 11, 2008 was
9,300.
See Part III, Item 12 of this report for the
information concerning the Companys Equity
Compensation Plans.
Dividends
Declaration of dividends is at the discretion of the
Companys Board of Directors and will depend upon the
earnings and financial condition of the Company and such other
factors as the Board of Directors deems appropriate.
Issuer
Repurchases of Common Stock
Repurchases made in the fourth quarter (in whole numbers of
shares and dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(d)
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
Dollar Value
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
of Shares
|
|
|
|
(a)
|
|
|
(b)
|
|
|
as Part of
|
|
|
that may yet
|
|
|
|
Total
|
|
|
Average
|
|
|
Publicly
|
|
|
be Purchased
|
|
|
|
Number of
|
|
|
Price
|
|
|
Announced
|
|
|
under the
|
|
|
|
Shares
|
|
|
Paid per
|
|
|
Plans or
|
|
|
Plans or
|
|
Period
|
|
Purchased
|
|
|
Share
|
|
|
Programs
|
|
|
Programs
|
|
|
October 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(October 1, 2007 to October 28, 2007)
|
|
|
2,593,100
|
|
|
$
|
29.0514
|
|
|
|
2,593,100
|
|
|
$
|
165,217,112
|
|
November 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(October 29, 2007 to December 2, 2007)
|
|
|
810,000
|
|
|
$
|
27.6669
|
|
|
|
810,000
|
|
|
$
|
142,806,963
|
|
December 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(December 3, 2007 to December 30, 2007)
|
|
|
1,261,500
|
|
|
$
|
26.3227
|
|
|
|
1,261,500
|
|
|
$
|
109,600,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,664,600
|
|
|
$
|
28.0730
|
|
|
|
4,664,600
|
|
|
$
|
109,600,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
In August 2007, the Companys Board of Directors authorized
the repurchase of up to $500 million in common stock after
two previous authorizations dated May 2005 and July 2006 of
$350 million each were fully utilized. In February 2008,
the Companys Board of Directors authorized the repurchase
of up to an additional $500 million in common stock.
Purchases of the Companys common stock may be made from
time to time, subject to market conditions. These shares may be
repurchased in the open market or through privately negotiated
transactions. The Company has no obligation to repurchase shares
under the authorization, and the timing, actual number and value
of the shares that are repurchased will depend on a number of
factors, including the price of the Companys stock. The
Company may suspend or discontinue the program at any time and
there is no expiration date.
|
|
Item 6.
|
Selected
Financial Data
|
(Thousands
of dollars and shares except per share data and
ratios)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Statement of Earnings Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
3,837,557
|
|
|
|
3,151,481
|
|
|
|
3,087,627
|
|
|
|
2,997,510
|
|
|
|
3,138,657
|
|
Net earnings before cumulative effect of accounting change
|
|
$
|
333,003
|
|
|
|
230,055
|
|
|
|
212,075
|
|
|
|
195,977
|
|
|
|
175,015
|
|
Per Common Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before cumulative effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.13
|
|
|
|
1.38
|
|
|
|
1.19
|
|
|
|
1.11
|
|
|
|
1.01
|
|
Diluted
|
|
$
|
1.97
|
|
|
|
1.29
|
|
|
|
1.09
|
|
|
|
.96
|
|
|
|
.94
|
|
Cash dividends declared
|
|
$
|
.64
|
|
|
|
.48
|
|
|
|
.36
|
|
|
|
.24
|
|
|
|
.12
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,237,063
|
|
|
|
3,096,905
|
|
|
|
3,301,143
|
|
|
|
3,240,660
|
|
|
|
3,163,376
|
|
Total long-term debt
|
|
$
|
845,071
|
|
|
|
494,917
|
|
|
|
528,389
|
|
|
|
626,822
|
|
|
|
688,204
|
|
Ratio of Earnings to Fixed Charges(1)
|
|
|
10.86
|
|
|
|
9.74
|
|
|
|
8.33
|
|
|
|
6.93
|
|
|
|
4.56
|
|
Weighted Average Number of Common Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
156,054
|
|
|
|
167,100
|
|
|
|
178,303
|
|
|
|
176,540
|
|
|
|
173,748
|
|
Diluted
|
|
|
171,205
|
|
|
|
181,043
|
|
|
|
197,436
|
|
|
|
196,048
|
|
|
|
190,058
|
|
|
|
|
(1) |
|
For purposes of calculating the ratio of earnings to fixed
charges, fixed charges include interest expense and one-third of
rentals; earnings available for fixed charges represent earnings
before fixed charges and income taxes. |
|
|
|
See Forward-Looking Information and Risk Factors That May
Affect Future Results contained in Item 1A of this
report for a discussion of risks and uncertainties that may
affect future results. Also see Managements
Discussion and Analysis of Financial Condition and Results of
Operations contained in Item 7 of this report for a
discussion of factors affecting the comparability of information
contained in this Item 6. |
19
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion should be read in conjunction with the
audited consolidated financial statements of the Company
included in Part II Item 8 of this document.
This Managements Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking
statements concerning the Companys expectations and
beliefs. See Item 1A Forward-Looking Information and
Risk Factors That May Affect Future Results for a
discussion of other uncertainties, risks and assumptions
associated with these statements.
(Thousands of Dollars and Shares Except Per Share Data)
Executive
Summary
The Company earns revenue and generates cash through the sale of
a variety of toy and game products, as well as through the
out-licensing of its properties for use in connection with
non-competing products offered by third parties. The Company
sells its products both within the United States and in a number
of international markets. The Companys business is highly
seasonal with a significant amount of revenues occurring in the
second half of the year and within that half, the fourth
quarter. In 2007, 66% of the Companys net revenues were
generated in the second half of the year with 34% of annual net
revenues generated in the fourth quarter. In 2006 and 2005,
percentages were 68% and 67% for the second half, respectively,
and comparable at 35% for the fourth quarter. While many of the
Companys products are based on brands the Company owns or
controls, the Company also offers products which are licensed
from outside inventors. In addition, the Company licenses rights
to produce products based on movie, television, music and other
entertainment properties, such as MARVEL and STAR WARS
properties.
The Companys business is primarily separated into two
business segments, North America and International. The North
American segment develops, markets and sells both toy and game
products in the U.S., Mexico and Canada. The International
segment consists of the Companys European, Asia Pacific
and Latin America marketing operations. In addition to these two
primary segments, the Companys world-wide manufacturing
and product sourcing operations are managed through its Global
Operations segment. The Hasbro Products Group is responsible for
the worldwide out-licensing of the Companys intellectual
properties and works closely with the North American and
International segments on the development and out-licensing of
the Companys brands.
The Companys focus remains on growing core owned and
controlled brands, developing new and innovative products which
respond to market insights and optimizing efficiencies within
the Company to reduce costs, increase operating profits and
strengthen its balance sheet. While the Company believes it has
achieved a more sustainable revenue base by developing and
maintaining its core brands and avoiding reliance on licensed
entertainment properties, it continues to opportunistically
enter into or leverage existing strategic licenses which
complement its brands and key strengths. In 2007, the Company
had significant sales of products related to the Companys
license with Marvel Entertainment, Inc. and Marvel Characters,
Inc. (collectively Marvel), primarily due to the
theatrical release of SPIDERMAN-3 in May of 2007. Given the
strength of its core brands, the Company may also seek to drive
product-related revenues by increasing the visibility of its
core brands through entertainment-based theatrical venues. As an
example of this, in July of 2007, the TRANSFORMERS motion
picture was released and the Company developed and marketed
products based on the motion picture. As a result of pairing
this core brand with this type of entertainment, both the movie
and the product line benefited. Net revenues during 2007 related
to the TRANSFORMERS line of products totaled approximately
$482,000, or 12.6% of consolidated net revenues.
The Companys core brands represent Company-owned or
Companycontrolled brands, such as TRANSFORMERS, MY LITTLE
PONY, MONOPOLY, MAGIC: THE GATHERING, PLAYSKOOL, G.I. JOE and
TONKA, which have been successful over the long term. The
Company has a large portfolio of owned and controlled brands,
which can be introduced in new formats and platforms over time.
These brands may also be further extended by pairing a licensed
concept with a core brand. By focusing on core brands, the
Company is working to build a more consistent revenue stream and
basis for future growth. In 2007 the Company had strong sales of
core brand products, namely TRANSFORMERS, LITTLEST PET SHOP, MY
LITTLE PONY, PLAYSKOOL, MONOPOLY, NERF, and PLAY-DOH.
20
In addition to its focus on core brands, the Companys
strategy also involves trying to meet ever-changing consumer
preferences by identifying and offering innovative products
based on market opportunities and insights. The Company believes
its strategy of focusing on the development of its core brands
and continuing to identify innovative new products will help to
prevent the Company from being dependent on the success of any
one product line.
While the Companys strategy has continued to focus on
growing its core brands and developing innovative new products,
it will continue to evaluate and enter into arrangements to
license properties when the Company believes it is economically
attractive. In 2006, the Company entered into a license with
Marvel to produce toys and games based on Marvels
portfolio of characters. The Company had significant sales of
products related to this license during 2007, primarily due to
the theatrical release of SPIDER-MAN 3 in May of 2007. The
Company has also incurred royalties on products based on the
theatrical release of TRANSFORMERS in July 2007. While gross
profits of theatrical entertainment-based products are generally
higher than many of the Companys other products, sales
from these products also incur royalty expenses payable to the
licensor. Such royalties reduce the impact of these higher gross
margins. In certain instances, such as with Lucasfilms
STAR WARS, the Company may also incur amortization expense on
property right-based assets acquired from the licensor of such
properties, further impacting profit made on these products.
The Companys long-term strategy also focuses on extending
its brands further into the digital world. As part of this
strategy, in August 2007, the Company announced a multi-year
strategic agreement with Electronic Arts Inc. (EA).
The agreement gives EA the exclusive worldwide rights, subject
to existing limitations on the Companys rights and certain
other exclusions, to create digital games for all platforms,
such as mobile phones, gaming consoles and personal computers,
based on a broad spectrum of the Companys intellectual
properties, including MONOPOLY, SCRABBLE, YAHTZEE, NERF, TONKA
and LITTLEST PET SHOP. As part of this agreement, the Company
has also obtained the rights to create toys and non-digital
games based on EAs intellectual properties. The first
games under this agreement are expected to launch in 2008.
While the Company remains committed to investing in the growth
of its business, it continues to be focused on reducing fixed
costs through efficiencies and on profit improvement. Over the
last 5 years the Company has improved its operating margin
from 7.8% in 2002 to 13.5% in 2007. The Company reviews it
operations on an ongoing basis and seeks to reduce its cost
structure in an efficient manner. In 2006 the Company announced
a reduction of its manufacturing activity in Ireland and
transition of the manufacture of certain products to the
Companys suppliers in China, and recently the Company
announced a restructuring of its games manufacturing facility in
the U.S. that is also expected to result in work practice
efficiencies and cost reductions. The Company is also investing
to grow its business in emerging international markets and will
continue to evaluate strategic alliances and acquisitions which
may complement its current product offerings or allow it entry
into an area which is adjacent to and complementary to the toy
and game business. For example, in January of 2008, the Company
acquired Cranium, Inc., which develops and markets a wide range
of CRANIUM branded games and related products. In 2008, the
Company expects to leverage revenue to offset the impact of
these investments on its operating margins.
In recent years, the Company has been seeking to return excess
cash to its shareholders through share repurchases and
dividends. As part of this initiative, over the last three
years, the Companys Board of Directors (the
Board) has adopted three repurchase authorizations
with a cumulative authorized repurchase amount of $1,200,000.
After fully exhausting the prior two authorizations, the third
authorization was passed on August 2, 2007 for $500,000.
During the third and fourth quarters of 2007, $390,399 of common
stock was repurchased under this authorization. For the years
ended 2007, 2006 and 2005, the Company invested $587,004,
$456,744 and $48,030, respectively, in the repurchase of 20,795,
22,767 and 2,386 shares, respectively, in the open market.
Also, in May of 2007, the Company paid $200,000 in cash to
repurchase exercisable warrants to purchase 15,750 shares
of the Companys common stock. Subsequent to
December 30, 2007, the Board approved an additional
$500,000 share repurchase authorization. The Company
intends to opportunistically repurchase shares in the future
subject to market conditions. In addition, in February 2008, the
Company announced an increase in its quarterly dividend to $0.20
per share. This was the fifth consecutive year that the Board
has increased the dividend.
21
Summary
The components of the results of operations, stated as a percent
of net revenues, are illustrated below for each of the three
fiscal years ended December 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
41.1
|
|
|
|
41.4
|
|
|
|
41.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
58.9
|
|
|
|
58.6
|
|
|
|
58.3
|
|
Amortization
|
|
|
1.8
|
|
|
|
2.5
|
|
|
|
3.3
|
|
Royalties
|
|
|
8.2
|
|
|
|
5.4
|
|
|
|
8.0
|
|
Research and product development
|
|
|
4.4
|
|
|
|
5.4
|
|
|
|
4.9
|
|
Advertising
|
|
|
11.3
|
|
|
|
11.7
|
|
|
|
11.8
|
|
Selling, distribution and administration
|
|
|
19.7
|
|
|
|
21.7
|
|
|
|
20.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
13.5
|
|
|
|
11.9
|
|
|
|
10.1
|
|
Interest expense
|
|
|
0.9
|
|
|
|
0.9
|
|
|
|
1.0
|
|
Interest income
|
|
|
(0.8
|
)
|
|
|
(0.9
|
)
|
|
|
(0.8
|
)
|
Other (income) expense, net
|
|
|
1.4
|
|
|
|
1.1
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
12.0
|
|
|
|
10.8
|
|
|
|
10.1
|
|
Income taxes
|
|
|
3.3
|
|
|
|
3.5
|
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
8.7
|
%
|
|
|
7.3
|
%
|
|
|
6.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results
of Operations
The fiscal years ended December 30, 2007 and
December 25, 2005 were fifty-two week periods while the
fiscal year ended December 31, 2006 was a fifty-three week
period.
Net earnings for the fiscal year ended December 30, 2007
were $333,003, or $1.97 per diluted share. This compares to net
earnings for fiscal 2006 and 2005 of $230,055 and $212,075, or
$1.29 and $1.09 per diluted share, respectively.
Net earnings includes non-operating (income) expense related to
the change in fair value of certain warrants required to be
classified as a liability of $44,370 in 2007, $31,770 in 2006,
and $(2,080) in 2005. These warrants were repurchased during May
2007. Net earnings for 2007 also includes a favorable tax
adjustment of $29,619, or $0.17 per diluted share, related to
the recognition of certain previously unrecognized tax benefits.
Net earnings for 2005 include income tax expense of
approximately $25,800 related to the Companys repatriation
of approximately $547,000 of foreign earnings in the fourth
quarter of 2005 pursuant to the special incentive provided by
the American Jobs Creation Act of 2004.
On December 26, 2005, the first day of fiscal 2006, the
Company adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment
(SFAS 123R), which required that the Company
measure all stock-based compensation awards using a fair value
method and record such expense in its financial statements. The
Company adopted this statement using the modified prospective
method. Under this adoption method, the Company is recording
expense related to stock option awards that were unvested as of
the date of adoption as well as all awards made after the date
of adoption. Accordingly, 2005 net earnings do not include
expense related to stock options.
Consolidated net revenues for the year ended December 30,
2007 were $3,837,557 compared to $3,151,481 in 2006 and
$3,087,627 in 2005. Most of the Companys net revenues and
operating profits were derived from its two principal segments:
North America and International, which are discussed in detail
below. Consolidated net revenues were positively impacted by
foreign currency translation in the amount of $94,500
22
in 2007 and $27,800 in 2006 as the result of the overall weaker
U.S. dollar in each of those years. The following table
presents net revenues and operating profit data for the
Companys two principal segments for 2007, 2006 and 2005.
The operating profit for 2005 for each of these segments has
been adjusted to include the impact of expense related to stock
options as disclosed under SFAS 123, consistent with the
Companys management reporting. See notes 1 and 15 to
the consolidated financial statements for further details.
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
%
|
|
|
|
|
|
|
2007
|
|
|
Change
|
|
|
2006
|
|
|
Change
|
|
|
2005
|
|
|
Net Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
2,460,016
|
|
|
|
15
|
%
|
|
$
|
2,130,290
|
|
|
|
4
|
%
|
|
$
|
2,038,556
|
|
International
|
|
$
|
1,278,589
|
|
|
|
33
|
%
|
|
$
|
959,319
|
|
|
|
(3
|
)%
|
|
$
|
988,591
|
|
Operating Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
318,737
|
|
|
|
16
|
%
|
|
$
|
275,959
|
|
|
|
67
|
%
|
|
$
|
165,676
|
|
International
|
|
$
|
158,846
|
|
|
|
75
|
%
|
|
$
|
90,893
|
|
|
|
(15
|
)%
|
|
$
|
106,435
|
|
North
America
North American segment net revenues for the year ended
December 30, 2007 increased 15% to $2,460,016 from
$2,130,290 in 2006. The impact of foreign currency translation
on North American segment net revenues in 2007 was favorable,
primarily due to the strength of the Mexican peso and Canadian
dollar, and increased net revenues by approximately $4,800. The
increase was due primarily to increased revenues in the
boys toys category driven by sales of MARVEL and
TRANSFORMERS products due to the theatrical releases of
SPIDER-MAN 3 in May 2007 and TRANSFORMERS in July 2007. Although
STAR WARS product sales declined in 2007 from 2006, sales of
these products have continued to be a significant contributor to
boys toys revenues in 2007. Revenues in the girls
toys category increased as a result of higher sales of LITTLEST
PET SHOP and FURREAL FRIENDS products as well as higher revenues
from the BABY ALIVE line which was reintroduced in the second
quarter of 2006. To a lesser extent, revenues in the girls
toys category were positively impacted by increased shipments of
MY LITTLE PONY products. Girls toys revenues were
negatively impacted by decreased sales of EASY-BAKE oven
products due to the recall of the product in July of 2007.
Revenues from the preschool category were flat for 2007. Revenue
from games and puzzles decreased slightly due to lower revenues
from trading card and plug and play games partially offset by
increased sales of traditional board games. Revenues from the
tweens category decreased as a result of lower sales of
electronic products such as VIDEONOW, ZOOMBOX and I-DOG
partially offset by increased sales of NERF products. Revenues
in 2007 were also positively impacted by increased sales of
TOOTH TUNES.
North American operating profit increased to $318,737 in 2007
from $275,959 in 2006. Operating profit in 2007 was positively
impacted by approximately $1,500 due to the translation of
foreign currencies to the U.S. dollar. The increase in
operating profit is primarily the result of higher gross profits
resulting from the higher revenues discussed above. Although
North American gross profit increased as a result of higher
revenues, this increase in gross profit was negatively impacted
by approximately $10,400 of charges recorded in the second
quarter of 2007 related to the July 2007 EASY-BAKE oven recall.
The increase in gross profit was also partially offset by higher
royalty expense as the result of the increased sales of MARVEL
and TRANSFORMERS movie-related products. Operating profit was
also impacted by higher advertising expense as well as higher
selling and distribution costs related to the increased sales
volume. In addition, North American operating profit included
increased investment spending in an online initiative of the
Companys Wizards of the Coast operation.
North American segment net revenues for the year ended
December 31, 2006 increased 4% to $2,130,290 from
$2,038,556 in 2005. The impact of foreign currency translation
on North American segment net revenues in 2006 was favorable and
increased net revenues by approximately $3,200. Anticipated
decreased revenues of STAR WARS products were more than offset
primarily by increased sales of LITTLEST PET SHOP, PLAYSKOOL,
NERF, I-DOG and MONOPOLY products, as well as revenues from the
successful reintroduction of BABY ALIVE. Revenues in 2006 were
also positively impacted, to a lesser extent, by increased sales
of PLAY-DOH and TRANSFORMERS products. STAR WARS revenues were
significant in 2005 due to the
23
theatrical and DVD releases of STAR WARS EPISODE III: REVENGE OF
THE SITH and remained strong in 2006.
North American segment operating profit increased to $275,959 in
2006 from $165,676 in 2005. The increase in operating profit was
primarily due to increased gross profit as a result of the
increased sales in 2006 as well as decreases in royalty and
amortization expense principally due to the decrease in sales of
STAR WARS products. Operating profit for the North American
segment was negatively impacted by higher research and product
development costs due to higher investments in the PLAYSKOOL
line and costs related to MARVEL products introduced in 2007.
North American operating profit was negatively impacted in 2005
by a loss of approximately $23,000 in the electronic games
category, which included charges associated with inventory
obsolescence and customer allowances related to plug and play
games.
International
International segment net revenues for the year ended
December 30, 2007 increased by 33% to $1,278,589 from
$959,319 in 2006. In 2007, net revenues were positively impacted
by currency translation of approximately $88,500 as a result of
a weaker U.S. dollar. Although international revenues
increased in all categories, the largest increase in net
revenues was in the boys toys category. As in the North
American segment, this increase was driven by higher sales of
TRANSFORMERS products resulting from the theatrical release of
the TRANSFORMERS movie in most countries in July of 2007 and
MARVEL products resulting from the theatrical release of
SPIDER-MAN 3 in May of 2007. Increased revenues in the
girls toys category were principally the result of
increased sales of LITTLEST PET SHOP products, and to a lesser
extent, MY LITTLE PONY products. Revenues in the preschool
category were higher in 2007 based on increased sales of
PLAYSKOOL products, partially due to strong revenues of IN THE
NIGHT GARDEN in the United Kingdom. Revenues in the games and
puzzles category increased primarily due to increased sales of
MONOPOLY. Revenues from the tweens category increased primarily
as a result of sales of the POWER TOUR GUITAR which was
introduced in 2007.
International segment operating profit increased 75% to $158,846
in 2007 from $90,893 in 2006. Operating profit for the segment
in 2007 was positively impacted by approximately $10,400 due to
the translation of foreign currencies to the U.S. dollar.
The remaining increase in operating profit is due to the higher
revenues discussed above. The increased gross profit as a result
of the higher revenues was partially offset by higher royalty
expense due to higher sales of MARVEL and TRANSFORMERS products
as well as higher advertising and selling, distribution and
administration expenses.
International segment net revenues for the year ended
December 31, 2006 decreased by 3% to $959,319 from $988,591
in 2005. In 2006 net revenues were positively impacted by
currency translation by approximately $24,300 as a result of a
weaker U.S. dollar. The decrease in net revenues was
primarily the result of decreased sales of STAR WARS products in
2006 as well as decreased sales of FURBY and DUEL MASTERS
products. These decreases were partially offset by increased
revenues from LITTLEST PET SHOP, PLAYSKOOL and MONOPOLY
products. To a lesser extent, 2006 net revenues were also
positively impacted by increased sales of MY LITTLE PONY,
TRANSFORMERS and PLAY-DOH products as well as the reintroduction
of the BABY ALIVE doll.
International segment operating profit decreased 15% to $90,893
in 2006 from $106,435 in 2005. Operating profit for the segment
in 2006 was positively impacted by approximately $4,900 due to
the translation of foreign currencies to the U.S. dollar.
The decrease in operating profit was the result of decreased
gross profit primarily as a result of the decrease in net
revenues, partially offset by decreases in royalties and
amortization expense as a result of the decrease in sales of
STAR WARS products.
Gross
Profit
The Companys gross profit margin increased to 58.9% for
the year ended December 30, 2007 from 58.6% in 2006. This
increase is due to changes in product mix, primarily the
positive impact of higher sales of licensed products. Although
licensed products generally carry a higher gross margin, the
increased gross margin is largely offset by higher royalty
expense associated with these products. Gross profit in 2007 was
24
also negatively impacted by approximately $10,400 in charges
related to the recall of the Companys EASY-BAKE oven
product and by a charge of approximately $10,000 related to a
restructuring and related reduction in work force at the
Companys manufacturing facility in East Longmeadow,
Massachusetts. This charge consisted primarily of severance
costs.
The Companys gross profit margin was 58.6% for the year
ended December 31, 2006 compared to 58.3% in 2005. The
increase was due to increased revenues from certain core brand
products that have higher gross margins, such as LITTLEST PET
SHOP products and traditional board games, such as MONOPOLY.
Gross profit in 2006 was negatively impacted by a charge of
approximately $10,300 related to the Companys decision to
transfer certain manufacturing activities from its Ireland
manufacturing facility to its suppliers in China. Gross margin
in 2005 was also negatively impacted by inventory obsolescence
and customer allowances on plug and play games.
Expenses
The Companys operating expenses, stated as percentages of
net revenues, are illustrated below for the three fiscal years
ended December 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Amortization
|
|
|
1.8
|
%
|
|
|
2.5
|
%
|
|
|
3.3
|
%
|
Royalties
|
|
|
8.2
|
|
|
|
5.4
|
|
|
|
8.0
|
|
Research and product development
|
|
|
4.4
|
|
|
|
5.4
|
|
|
|
4.9
|
|
Advertising
|
|
|
11.3
|
|
|
|
11.7
|
|
|
|
11.8
|
|
Selling, distribution and administration
|
|
|
19.7
|
|
|
|
21.7
|
|
|
|
20.2
|
|
Amortization expense continued to decrease in 2007 to $67,716
from $78,934 in 2006 and $102,035 in 2005. A portion of
amortization expense relates to licensing rights and is based on
expected sales of products related to those licensing rights.
The decrease in amortization expense in 2007 and 2006 primarily
relates to decreased amortization of the product rights related
to STAR WARS.
Royalty expense increased to $316,807 or 8.2% of net revenues in
2007 compared to $169,731 or 5.4% of net revenues in 2006. This
increase is primarily due to increased sales of
entertainment-based products, primarily MARVEL and TRANSFORMERS
movie-related products due to the theatrical releases of
SPIDER-MAN 3
and TRANSFORMERS in 2007. Royalty expense decreased to $169,731
or 5.4% of net revenues in 2006 compared to $247,283 or 8.0% of
net revenues in 2005. This decrease primarily relates to the
decrease in sales of STAR WARS products in 2006 from 2005.
Research and product development expense decreased in 2007 to
$167,194 or 4.4% of net revenues from $171,358 or 5.4% of net
revenues in 2006. This decrease reflects higher investments in
the prior year, primarily related to the MARVEL product lines.
Research and product development expense increased in 2006 to
$171,358 or 5.4% of net revenues from $150,586 or 4.9% of net
revenues in 2005. This increase was the result of development
expenses related to the MARVEL line of products as well as
increased investment in the PLAYSKOOL line.
Advertising expense increased in dollars to $434,742 in 2007
from $368,996 in 2006, but decreased as a percentage of revenues
to 11.3% from 11.7% in 2006. The decrease as a percentage of
revenues primarily relates to the mix of sales in 2007, which
included increased sales of entertainment-based products, which
require lower amounts of advertising and promotion. Revenues
related to entertainment-based properties have increased in 2007
with the release of the SPIDER-MAN 3 and TRANSFORMERS movies.
The increase in dollars is primarily due to continued investment
in our PLAYSKOOL line as well as other core brands, and to a
lesser extent, the impact of foreign exchange. Advertising
expense in 2006 was $368,996 or 11.7% of net revenues which was
consistent with the 2005 expense of $366,371 or 11.8% of net
revenues.
Selling, distribution and administration expenses increased in
dollars to $755,127 from $682,214 in 2006 but decreased as a
percentage of revenues to 19.7% from 21.7% in 2006. The increase
in dollars reflects higher variable selling and distribution
costs resulting from higher revenues in 2007, as well as higher
25
incentive compensation provisions, the impact of foreign
currency, and general inflationary increases. The decrease as a
percentage of revenues reflects the fixed nature of certain of
these expenses. Selling, distribution and administration
expenses were $682,214 or 21.7% of net revenues in 2006 compared
to $624,560 or 20.2% in 2005. Approximately $20,000 of this
increase related to the Companys adoption of
SFAS 123R in 2006 which required that the Company measure
all stock-based compensation awards using a fair value method
and record such expense in its financial statements. The
remainder of the increase primarily related to increased sales
and marketing expense in 2006 associated with the higher level
of sales and increased bonus and incentive provisions due to the
strong performance of the Company in 2006.
Interest
Expense
Interest expense increased to $34,618 in 2007 from $27,521 in
2006. The increase in interest expense was primarily the result
of higher average borrowings in 2007. In September 2007, the
Company issued $350,000 of Notes that are due in 2017. The
majority of the proceeds from the issuance of these Notes were
used to repay short-term debt resulting from increased
repurchases of common stock as well as the repurchase of the
Lucas warrants for $200,000.
Interest expense decreased to $27,521 in 2006 from $30,537 in
2005. The decrease in interest expense mainly reflected the
reduction in the Companys long-term debt over that period.
The Company repurchased or repaid principal amounts of long-term
debt of $32,743 in 2006 and $93,303 in 2005.
Interest
Income
Interest income was $29,973 in 2007 compared to $27,609 in 2006
and $24,157 in 2005. Interest income includes $5,200 in 2006
related to a long-term deposit that was refunded during 2006 and
approximately $4,100 in 2005 related to an IRS settlement. The
increase in interest income in 2007 primarily reflects higher
average rates of return in 2007. To a lesser extent, the
increase reflects higher average invested balances in 2007.
During a portion of 2007 and 2006, the Company invested excess
cash in auction rate securities, which generated a higher rate
of return and contributed to the increases in interest income in
2007 and 2006. The Company had no investments in auction rate
securities at December 30, 2007.
Other
(Income) Expense, Net
Other (income) expense, net of $52,323 in 2007 compares to
$34,977 in 2006 and $(6,772) in 2005. The major component of
other (income) expense is non-cash (income) expense related to
the change in fair value of certain warrants required to be
classified as a liability. These warrants were required to be
adjusted to their fair value each quarter through earnings. For
2007, 2006 and 2005, expense (income) related to the change in
fair value of these warrants was $44,370, $31,770 and $(2,080),
respectively. In May 2007, the Company exercised the call option
on these warrants and repurchased the warrants for $200,000 in
cash, which approximated fair value at that date. As these
warrants have been repurchased there will be no further fair
value adjustments.
In addition to the above, other (income) expense, net in 2006
also included $2,629 representing a write-down of the value of
common stock of Infogrames, held by the Company as an
available-for-sale investment. This write-down resulted from an
other-than-temporary decline in the fair value of this
investment.
Income
Taxes
Income tax expense totaled 28.0% of pretax earnings in 2007
compared with 32.6% in 2006 and 31.8% in 2005. Income tax
expense for 2007 is net of a benefit of $29,999 of discrete tax
events, primarily relating to the recognition of previously
unrecognized tax benefits. Income tax expense for 2006 includes
a charge of approximately $7,800 of discrete tax events,
primarily relating to the settlement of various tax exams in
multiple jurisdictions. Income tax expense for 2005 includes a
charge of approximately $25,800 related to the repatriation of
$547,000 of foreign earnings pursuant to the special incentive
provided by the American Jobs Creation Act of 2004. Income tax
expense for 2005 was also reduced by approximately $4,000, due
primarily to the settlement of an Internal Revenue Service
examination of tax years ending in December 2001. Absent
26
these items, potential interest and penalties in 2007 related to
uncertain tax positions, and the effect of the adjustment of
certain warrants to their fair value, which has no tax effect,
the 2007 effective tax rate would have been 30.5% compared to
27.6% in 2006 and 24.9% in 2005. The increase in the adjusted
rate to 30.5% in 2007 compared to 27.6% in 2006 primarily
reflects the decision to repatriate a portion of 2007
international earnings to the U.S. The increase in the
adjusted rate to 27.6% in 2006 from 24.9% in 2005 was the result
of higher earnings in jurisdictions with higher statutory tax
rates.
Liquidity
and Capital Resources
The Company has historically generated a significant amount of
cash from operations. In 2007, the Company primarily funded its
operations and liquidity needs through cash flows from
operations, and, when needed, proceeds from its accounts
receivable securitization program and borrowings under its
unsecured credit facilities. In September 2007 the Company
issued $350,000 in principal amount of notes that are due in
2017 (the Notes). The proceeds from the sale of the
Notes were primarily used to repay the Companys short-term
borrowings while the remainder of the proceeds were used for
general corporate purposes. During 2008, the Company expects to
continue to fund its working capital needs primarily through
cash flows from operations and, when needed, using proceeds from
its accounts receivable securitization program and borrowings
under its available lines of credit. The Company believes that
the funds available to it, including cash expected to be
generated from operations and funds available through its
accounts receivable securitization program and other available
lines of credit are adequate to meet its working capital needs
for 2008.
At December 30, 2007, cash and cash equivalents, net of
short-term borrowings, were $764,257 compared to $704,818 and
$927,592 at December 30, 2006 and December 25, 2005,
respectively. Hasbro generated $601,794, $320,647, and $496,624
of cash from its operating activities in 2007, 2006 and 2005,
respectively. The higher cash flows from operations in 2007
compared to 2006 were primarily the result of increased earnings
as well as the mix of products in 2007 net revenues. Net
earnings in 2007 included increased non-cash royalty expenses
primarily as a result of increased revenues from MARVEL
products. The royalty expense related to revenues from MARVEL
products in 2007 was paid in 2006. Similarly, the higher cash
flows from operations in 2005 compared to 2006 was primarily due
to the mix of products in 2005 net revenues. Net earnings
in 2005 included increased non-cash royalty expenses primarily
as a result of increased STAR WARS revenues. Increased royalty
expense in 2005 related to revenues from STAR WARS products,
most of which had been paid in prior years. In 2007, 2006 and
2005, operating cash flows were impacted by royalty advances
paid of $70,000, $105,000 and $35,000 related to MARVEL in 2007
and 2006 and STAR WARS in 2005, respectively.
Accounts receivable increased to $654,789 at December 30,
2007 from $556,287 at December 31, 2006. The increase in
accounts receivable is primarily the result of higher sales
volume in 2007. Fourth quarter days sales outstanding remained
consistent at 45 days in both 2007 and 2006 compared to
44 days in 2005. The increase in days sales outstanding
from 2005 primarily reflects increases in international accounts
receivable due to the weaker U.S. dollar in 2006 and 2007.
The December 30, 2007 accounts receivable balance includes
an increase of approximately $31,100 related to the currency
impact of the weaker U.S. dollar. The Company has a
revolving accounts receivable securitization facility whereby
the Company is able to sell undivided fractional ownership
interests in qualifying accounts receivable on an ongoing basis.
At December 30, 2007 and December 31, 2006, there was
$250,000 sold at each period-end under this program.
Inventories increased to $259,081 at December 30, 2007 from
$203,337 at December 31, 2006. The increase in inventory
reflects the growth of the Companys business in 2007. In
addition, inventories increased approximately $9,400 due to the
weaker U.S. dollar in 2007. The increase in inventory to
$203,337 at December 31, 2006 from $179,398 at
December 25, 2005 represents higher levels of inventory at
December 31, 2006 due to anticipated sales of MARVEL
products in early 2007. In addition, inventories increased
approximately $6,100 due to the weaker U.S. dollar in 2006.
Prepaid expenses and other current assets decreased to $199,912
at December 30, 2007 from $243,291 at December 31,
2006. This decrease is primarily due to utilization of MARVEL
and Lucas royalty advances. Generally when the Company enters
into a licensing agreement for entertainment-based properties,
an advance
27
royalty payment is required at the inception of the agreement.
This payment is then recognized in the consolidated statement of
operations as the related sales are made. With respect to the
MARVEL and STAR WARS licenses, the Company had prepaid royalties
recorded in both current and non-current assets. Each reporting
period, the Company reflects as current prepaid assets the
amount of royalties it expects to reflect in the statement of
operations in the upcoming twelve months. The decrease in
prepaid expenses and other current assets also reflects a
decrease in deferred tax assets. Prepaid expenses and other
current assets increased to $243,291 in 2006 from $185,297 in
2005. This increase was primarily due to a royalty advance paid
to MARVEL in 2006, of which approximately $87,400 was recorded
in prepaid expenses and $12,930 was shown in other assets at
December 31, 2006.
Accounts payable and accrued expenses decreased to $742,122 at
December 30, 2007 from $895,311 at December 31, 2006.
The decrease is primarily due to the Company exercising its call
option related to warrants required to be classified as a
liability and repurchasing these warrants for $200,000 in cash
in the second quarter of 2007. At December 30, 2006, these
warrants had a fair value of $155,630. The decrease is also a
result of the reclassification of the liabilities related to
uncertain tax positions as a result of the adoption of FASB
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes at the beginning of 2007. These decreases
were partially offset by increases in accrued royalties
primarily due to the significant sales of TRANSFORMERS
movie-related products, accrued advertising due to higher levels
of advertising expense in the fourth quarter of 2007, as well as
higher accounts payable due to higher levels of inventory and
expenses as of December 30, 2007. Accounts payable and
accrued expenses increased to $895,311 at December 31, 2006
from $863,280 at December 25, 2005. Of this increase,
$31,770 related to the increase in fair value of the Lucas
warrants that the Company was required to record as liabilities
under SFAS 150. As a result of SFAS 150, the Company
classified these warrants containing a put option as a current
liability and adjusted the amount of this liability to its fair
value on a periodic basis. Increases from higher accrued bonus
and incentive payments as a result of the Companys strong
performance in 2006 were offset by decreases in other accrued
amounts, principally accrued royalties.
Cash flows from investing activities were a net utilization of
$112,465, $83,604, and $120,671 in 2007, 2006, and 2005,
respectively. In July 2007, with the exception of rights to
DUNGEONS & DRAGONS, the Company reacquired the
remaining digital gaming rights for its owned or controlled
properties held by Infogrames Entertainment SA (Infogrames). The
acquisition price of $19,000 included $18,000 in cash and $1,000
of non-cash consideration in the form of the return of
39 shares of preferred stock held by the Company in a
subsidiary of Infogrames. During 2005, the Company expended
$65,000 to reacquire the digital gaming rights for certain of
its owned or controlled properties from Infogrames. The rights
repurchased in 2007 and 2005 were previously held by Infogrames
on an exclusive basis as a result of a licensing agreement
entered into during 2000. In addition, in 2005 the Company
expended $14,179 to purchase the assets of Wrebbit Inc., a
Montreal-based creator and manufacturer of innovative puzzles.
The Company made no acquisitions in 2006. In 2005, the Company
also had proceeds from the sales of property, plant and
equipment of $33,083. These proceeds were primarily from the
sale of the Companys former manufacturing facility in
Spain. During 2007, the Company expended approximately $92,000
on additions to its property, plant and equipment compared to
$82,000 during 2006 and $71,000 during 2005. Of these amounts,
61% in 2007, 63% in 2006, and 61% in 2005 were for purchases of
tools, dies and molds related to the Companys products. In
2008, the Company expects capital expenditures to increase and
be in the range of $100,000 to $115,000. During the three years
ended December 30, 2007, depreciation and amortization of
plant and equipment was $88,804, $67,773, and $78,097,
respectively.
The Company commits to inventory production, advertising and
marketing expenditures prior to the peak third and fourth
quarter retail selling season. Accounts receivable increase
during the third and fourth quarter as customers increase their
purchases to meet expected consumer demand in the holiday
season. Due to the concentrated timeframe of this selling
period, payments for these accounts receivable are generally not
due until the fourth quarter or early in the first quarter of
the subsequent year. This timing difference between expenditures
and cash collections on accounts receivable made it necessary
for the Company to borrow varying amounts during the year.
During 2007, 2006 and 2005, the Company primarily utilized cash
from operations and its accounts receivable securitization
program to fund its operations.
28
The Company is party to an accounts receivable securitization
program whereby the Company sells, on an ongoing basis,
substantially all of its U.S. trade accounts receivable to
a bankruptcy remote special purpose entity, Hasbro Receivables
Funding, LLC (HRF). HRF is consolidated with the
Company for financial reporting purposes. The securitization
program then allows HRF to sell, on a revolving basis, an
undivided fractional ownership interest of up to $250,000 in the
eligible receivables it holds to certain bank conduits. During
the period from the first day of the October fiscal month
through the last day of the following January fiscal month, this
limit is increased to $300,000. The program provides the Company
with a cost-effective source of working capital. Based on the
amount of eligible accounts receivable as of December 30,
2007, the Company had $266,550 available to sell under this
program of which $250,000 was utilized.
The Company has a revolving credit agreement (the
Agreement) which provides it with a $300,000
committed borrowing facility. The Company has the ability to
request increases in the committed facility in additional
increments of at least $50,000, up to a total committed facility
of $500,000. The Agreement contains certain financial covenants
setting forth leverage and coverage requirements, and certain
other limitations typical of an investment grade facility,
including with respect to liens, mergers and incurrence of
indebtedness. The Company was in compliance with all covenants
as of and for the fiscal year ended December 30, 2007. The
Company had no borrowings outstanding under its committed
revolving credit facility at December 30, 2007. The Company
also has other uncommitted lines from various banks, of which
approximately $37,833 was utilized at December 30, 2007.
Amounts available and unused under the committed line at
December 30, 2007 were approximately $298,200.
Net cash utilized by financing activities was $433,917 in 2007.
Of this amount, $584,349, which includes transaction costs, was
used to repurchase shares of the Companys common stock. In
August 2007, the Companys Board of Directors authorized
the repurchase of an additional $500,000 in common stock after
two previous authorizations dated May 2005 and July 2006 of
$350,000 each were fully utilized. During 2007, the Company
repurchased 20,795 shares at an average price of $28.20. In
addition, the Company purchased certain warrants in May 2007 for
$200,000 in accordance with the terms of the call provision of
the amended Lucas warrant agreement. Dividends paid were $94,097
in 2007 reflecting the increase in the Companys quarterly
dividend rate to $0.16 per share in 2007 compared to $0.12 per
share in 2006. These uses of cash were partially offset by net
proceeds of $346,009 from the issuance of $350,000 of Notes that
are due in 2017. The proceeds from the Notes were primarily used
to repay short-term borrowings. The uses of cash were also
partially offset by cash receipts of $82,661 from the exercise
of employee stock options.
Net cash utilized by financing activities was $467,279 in 2006.
Of this amount, $456,744, which includes transaction costs, was
used to repurchase shares of the Companys common stock. In
July 2006, the Companys Board of Directors authorized the
repurchase of $350,000 in common stock subsequent to the full
utilization of the Board of Directors May 2005
authorization of $350,000. During 2006, the Company repurchased
22,767 shares at an average price of $20.03. In addition,
$32,743 was used to repay long-term debt. Dividends paid were
$75,282 in 2006 reflecting the increase in the Companys
quarterly dividend rate to $0.12 per share in 2006 compared to
$0.09 per share in 2005. These uses of cash were partially
offset by cash receipts of $86,257 from the exercise of employee
stock options.
Net cash utilized by financing activities was $158,641 in 2005.
This amount included repayments in principal amount of long-term
debt totaling $93,303. These amounts primarily related to
$71,970 of bonds that matured in November of 2005. The remaining
amount related to repayment of long-term debt associated with
the Companys former manufacturing facility in Spain.
Dividends paid increased to $58,901 as a result of the increase
of the quarterly dividend rate to $0.09 in 2005 from $0.06. In
2005, the Company repurchased 2,386 of its common shares on the
open market at an average price of $20.10 under the Board of
Directors May 2005 authorization. The total cost of
these repurchases, including transaction costs, was $48,030. The
Company received $45,278 in 2005 in proceeds from the exercise
of employee stock options.
At December 30, 2007, the Company has outstanding $249,828
in principal amount of senior convertible debentures due 2021.
The senior convertible debentures bear interest at 2.75%, which
could be subject to an upward adjustment in the rate, not to
exceed 11%, should the price of the Companys stock trade
at or below $9.72 per share for 20 of the 30 trading days
preceding the fifth day prior to an interest payment date. This
29
contingent interest feature represents a derivative instrument
that is recorded on the balance sheet at its fair value, with
changes in fair value recognized in the statement of operations.
If the closing price of the Companys stock exceeds $23.76
for at least 20 trading days, within the 30 consecutive trading
day period ending on the last trading day of the calendar
quarter, or upon other specified events, the debentures will be
convertible at an initial conversion price of $21.60 in the next
calendar quarter. At December 30, 2006, March 31,
2007, June 30, 2007 and September 30, 2007 this
conversion feature was met and the debentures were convertible
throughout 2007. During 2007, $168 of these debentures were
converted and 8 shares were issued. At December 30,
2007, this conversion feature was met again and the bonds are
convertible through March 31, 2008 at which time the
requirements of the conversion feature will be reevaluated. In
addition, if the closing price of the Companys stock
exceeds $27.00 for at least 20 trading days in any 30 day
period, the Company has the right to call the debentures by
giving notice to the holders of the debentures. During a
prescribed notice period, the holders of the debentures have the
right to convert their debentures in accordance with the
conversion terms described above. The holders of these
debentures may also put the notes back to Hasbro in December
2011 and December 2016 at the original principal amount. At that
time, the purchase price may be paid in cash, shares of common
stock or a combination of the two, at the Companys
discretion. While the Companys current intent is to settle
in cash any puts exercised, there can be no guarantee that the
Company will have the funds necessary to settle this obligation
in cash. On December 1, 2005, the holders of these
debentures had the option to put these notes back to Hasbro. On
that date, the Company redeemed $4 of these notes in cash.
The $350,000 Notes due in 2017 bear interest at a rate of 6.30%,
which may be adjusted upward in the event that the
Companys credit rating from Moodys Investor
Services, Inc., Standard & Poors Ratings
Services or Fitch Ratings is decreased two levels below the
Companys credit ratings on the date of issuance of the
Notes. On the date of issuance and throughout the remainder of
2007, the Companys ratings from Moodys Investor
Services, Inc., Standard & Poors Ratings
Services and Fitch Ratings were BBB, Baa2 and BBB, respectively.
The interest rate adjustment is dependent on the degree of
decrease of the Companys ratings and could range from
0.25% to a maximum of 2%. The Company may redeem the Notes at
its option at the greater of the principal amount of the Notes
or the present value of the remaining scheduled payments
discounted using the effective interest rate on applicable
U.S. Treasury bills at the time of repurchase.
The Company has remaining principal amounts of long-term debt at
December 30, 2007 of approximately $844,815. As detailed
below in Contractual Obligations and Commercial Commitments,
this debt is due at varying times from 2008 through 2028. In
addition, the Company is committed to guaranteed royalty and
other contractual payments of approximately $18,354 in 2008. The
Company also had letters of credit and other similar instruments
of approximately $70,000 and purchase commitments of $249,883
outstanding at December 30, 2007. The Company believes that
cash from operations, including the securitization facility,
and, if necessary, its line of credit, will allow the Company to
meet these and other obligations listed.
In August 2007, the Companys Board of Directors authorized
the repurchase of up to $500,000 in common stock after two
previous authorizations dated May 2005 and July 2006 of $350,000
each were fully utilized. Purchases of the Companys common
stock may be made from time to time, subject to market
conditions, and may be made in the open market or through
privately negotiated transactions. The Company has no obligation
to repurchase shares under the authorization and the timing,
actual number, and the value of the shares which are repurchased
will depend on a number of factors, including the price of the
Companys common stock. The Company may suspend or
discontinue repurchases of its stock at any time and there is no
expiration date for such repurchases. In 2007, the Company
repurchased 20,795 shares at an average price of $28.20.
The total cost of these repurchases, including transaction
costs, was $587,004. On February 7, 2008 the Board of
Directors approved an additional $500,000 share repurchase
authorization. On that date, approximately $48,300 remained
under the August 2007 repurchase authorization.
Critical
Accounting Policies and Significant Estimates
The Company prepares its consolidated financial statements in
accordance with accounting principles generally accepted in the
United States of America. As such, management is required to
make certain estimates, judgments and assumptions that it
believes are reasonable based on information available. These
30
estimates and assumptions affect the reported amounts of assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses for the periods
presented. The significant accounting policies which management
believes are the most critical to aid in fully understanding and
evaluating the Companys reported financial results include
sales allowances, recoverability of goodwill and intangible
assets, recoverability of royalty advances and commitments,
pension costs and obligations, stock-based compensation, and
income taxes.
Sales
Allowances
Sales allowances for customer promotions, discounts and returns
are recorded as a reduction of revenue when the related revenue
is recognized. Revenue from product sales is recognized upon
passing of title to the customer, generally at the time of
shipment. Revenue from product sales, less related sales
allowances, is added to royalty revenue and reflected as net
revenues in the consolidated statements of operations. The
Company routinely commits to promotional sales allowance
programs with customers. These allowances primarily relate to
fixed programs, which the customer earns based on purchases of
Company products during the year. Discounts are recorded as a
reduction of related revenue at the time of sale. While many of
the allowances are based on fixed amounts, certain of the
allowances, such as the returns allowance, are based on market
data, historical trends and information from customers and are
therefore subject to estimation. For its allowance programs that
are not fixed, such as returns, the Company estimates these
amounts using a combination of historical experience and current
market conditions. These estimates are reviewed periodically
against actual results and any adjustments are recorded at that
time as an increase or decrease to net revenues. During 2007,
there have been no material adjustments to the Companys
estimates.
Recoverability
of Goodwill and Intangible Assets
Goodwill and other intangible assets deemed to have indefinite
lives are tested for impairment at least annually. If an event
occurs or circumstances change that indicate that the carrying
value may not be recoverable, the Company will perform an
interim test at that time. The impairment test begins by
allocating goodwill and intangible assets to applicable
reporting units. Goodwill is then tested using a two step
process that begins with an estimation of the fair value of the
reporting unit using an income approach, which looks to the
present value of expected future cash flows.
The first step is a screen for potential impairment while the
second step measures the amount of impairment if there is an
indication from the first step that one exists. Intangible
assets with indefinite lives are tested for impairment by
comparing their carrying value to their estimated fair value
which is also calculated using an income approach. The
Companys annual impairment test was performed in the
fourth quarter of 2007 and no impairment was indicated. The
estimation of future cash flows requires significant judgments
and estimates with respect to future revenues related to the
respective asset and the future cash outlays related to those
revenues. Actual revenues and related cash flows or changes in
anticipated revenues and related cash flows could result in a
change in this assessment and result in an impairment charge.
The estimation of discounted cash flows also requires the
selection of an appropriate discount rate. The use of different
assumptions would increase or decrease estimated discounted cash
flows and could increase or decrease the related impairment
charge. At December 30, 2007, the Company has goodwill and
intangible assets with indefinite lives of $546,915 recorded on
the balance sheet.
Intangible assets, other than those with indefinite lives, are
amortized over their estimated useful lives and are reviewed for
indications of impairment whenever events or changes in
circumstances indicate the carrying value may not be
recoverable. Recoverability of the value of these intangible
assets is measured by a comparison of the assets carrying
value to the estimated future undiscounted cash flows expected
to be generated by the asset. If such assets were considered to
be impaired, the impairment would be measured by the amount by
which the carrying value of the asset exceeds its fair value
based on estimated future discounted cash flows. The estimation
of future cash flows requires significant judgments and
estimates with respect to future revenues related to the
respective asset and the future cash outlays related to those
revenues. Actual revenues and related cash flows or changes in
anticipated revenues and related cash flows could result in a
change in this assessment and result in an impairment charge.
The estimation of discounted cash flows also
31
requires the selection of an appropriate discount rate. The use
of different assumptions would increase or decrease estimated
discounted cash flows and could increase or decrease the related
impairment charge. Intangible assets covered under this policy
were $410,494 at December 30, 2007. During 2007, there were
no impairment charges related to these intangible assets.
Recoverability
of Royalty Advances and Commitments
The recoverability of royalty advances and contractual
obligations with respect to minimum guaranteed royalties is
assessed by comparing the remaining minimum guaranty to the
estimated future sales forecasts and related cash flow
projections to be derived from the related product. If sales
forecasts and related cash flows from the particular product do
not support the recoverability of the remaining minimum guaranty
or, if the Company decides to discontinue a product line with
royalty advances or commitments, a charge to royalty expense to
write-off the remaining minimum guaranty is required. The
preparation of revenue forecasts and related cash flows for
these products requires judgments and estimates. Actual revenues
and related cash flows or changes in the assessment of
anticipated revenues and cash flows related to these products
could result in a change to the assessment of recoverability of
remaining minimum guaranteed royalties. At December 30,
2007, the Company had $137,959 of prepaid royalties, $94,616 of
which are included in prepaid expenses and other current assets
and $43,343 which are included in other assets.
Pension
Costs and Obligations
The Company, except for certain international subsidiaries, has
pension plans covering substantially all of its full-time
employees. Pension expense is based on actuarial computations of
current and future benefits using estimates for expected return
on assets, expected compensation increases, and applicable
discount rates.
The estimates for the Companys U.S. plans are
established at the Companys measurement date. Prior to
2007, the Company used September 30 as its measurement date to
measure the liabilities and assets of the plans and to establish
the expense for the upcoming year. In accordance with the
provisions of Statement of Financial Accounting Standards
No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans,
(SFAS No. 158) which the Company adopted
in December of 2006, the Company changed its measurement date in
2007 to its fiscal year-end date. In accordance with this, the
liabilities and assets of the plans were remeasured as of
December 31, 2006. See note 11 to the consolidated
financial statements for the impact of this remeasurement.
The Company estimates expected return on assets using a weighted
average rate based on historical market data for the investment
classes of assets held by the plan, the allocation of plan
assets among those investment classes, and the current economic
environment. Based on this information, the Companys
estimate of expected return on U.S. plan assets was 8.75%
in 2007, 2006 and 2005. A decrease in the estimate used for
expected return on plan assets would increase pension expense,
while an increase in this estimate would decrease pension
expense. A decrease of 0.25% in the estimate of expected return
on plan assets would have increased 2007 pension expense for
U.S. plans by approximately $660.
Expected compensation increases are estimated using a
combination of historical and expected compensation increases.
Based on this analysis, the Companys estimate of expected
long-term compensation increases for its U.S. plans was
4.0% in 2007, 2006 and 2005. Increases in estimated compensation
increases would result in higher pension expense while decreases
would lower pension expense.
Discount rates are selected based upon rates of return at the
measurement date on high quality corporate bond investments
currently available and expected to be available during the
period to maturity of the pension benefits. Based on this
long-term corporate bond yield at December 30, 2007, the
Companys measurement date for its pension assets and
liabilities, the Companys discount rate for its
U.S. plans used for the calculation of 2007 pension expense
averaged 5.83% compared to a rate of 5.50% used in the
calculation of 2006 pension expense and 5.75% used in the
calculation of 2005 pension expense. A decrease in the discount
rate would result in greater pension expense while an increase
in the discount rate would decrease pension expense. A decrease
of 0.25% in the Companys discount rate would have
increased 2007 pension expense and the 2007 projected benefit
obligation by approximately $744 and $7,779, respectively.
32
In accordance with Statement of Financial Accounting Standards
No. 87, Employers Accounting for Pensions,
actual results that differ from the actuarial assumptions are
accumulated and, if outside a certain corridor, amortized over
future periods and, therefore generally affect recognized
expense in future periods. At December 30, 2007, the
Companys U.S. plans had unrecognized actuarial losses
of $19,158 included in accumulated other comprehensive income
related to its defined benefit pension plans. Pension plan
assets are valued on the basis of their fair market value on the
measurement date. Changes in the fair market value of plan
assets may impact the amount of future pension expense. During
2007 there were not significant declines in the fair value of
pension plan assets. As of December 30, 2007, the Company
froze benefits under its largest pension plans in the U.S., with
no future benefits accruing to employees. The Company will
continue to pay benefits under the plan consistent with the
provisions existing at the date of the plan benefit freeze.
Stock-Based
Compensation
The Company has a stock-based compensation plan for employees
and non-employee members of the Companys Board of
Directors. Under this plan, the Company may grant stock options
at or above the fair market value of the Companys stock,
as well as restricted stock, restricted stock units and
contingent stock performance awards. On December 26, 2005,
the first day of fiscal 2006, the Company adopted
SFAS 123R, which requires the Company to measure all
stock-based compensation awards using a fair value method and
record such expense in its consolidated financial statements.
The Company uses the Black-Scholes option pricing model to value
stock options that are granted under these plans. The
Black-Scholes method includes four significant assumptions:
(1) expected term of the options, (2) risk-free
interest rate, (3) expected dividend yield, and
(4) expected stock price volatility. For the Companys
2007 and 2006 stock option grants, the weighted average expected
term was approximately 5 years. This amount is based on a
review of employees exercise history relating to stock
options as well as the contractual term of the option. The
weighted average risk-free interest rates used for 2007 and 2006
stock option grants were 4.79% and 4.98%, respectively. This
estimate was based on the interest rate available on
U.S. treasury securities with durations that approximate
the expected term of the option. The weighted average expected
dividend yields used for the 2007 and 2006 stock option grants
were 1.97% and 2.55%, respectively, which is based on the
Companys current annual dividend amount divided by the
stock price on the date of the grant. The weighted average
expected stock price volatilities used for 2007 and 2006 stock
option grants were 22% and 24%, respectively. These amounts were
derived using a combination of current and historical implied
price volatility. Implied price volatility represents the
volatility implied in publicly traded options on the
Companys stock, which the Company believes represents the
expected future volatility of the Companys stock price.
The Company believes that since this is a market-based estimate,
it provides a better estimate of expected future volatility as
compared to based only on historical volatility.
In 2007 and 2006, as part of its employee stock-based
compensation plan, the Company issued contingent stock
performance awards, which provide the recipients with the
ability to earn shares of the Companys common stock based
on the Companys achievement of stated cumulative diluted
earnings per share and cumulative net revenue targets over the
three fiscal years ended December 2009 for the 2007 award,
and over a ten quarter period beginning July 3, 2006 and
ending December 2008 for the 2006 award. Each award has a
target number of shares of common stock associated with such
award which may be earned by the recipient if the Company
achieves the stated diluted earnings per share and net revenue
targets. These awards are valued based on the fair market value
of the Companys stock on the date of the grant. The
measurement of the expense related to this award is based on the
Companys current estimate of revenues and diluted earnings
per share over the performance period. Changes in these
estimates may impact the expense recognized related to these
awards.
Income
Taxes
The Companys annual tax rate is based on its income,
statutory tax rates and tax planning opportunities available in
the various jurisdictions in which it operates. Significant
judgment and estimates are required to determine the
Companys annual tax rate and in evaluating its tax
positions. Despite the Companys belief that its tax return
positions are fully supportable, these positions are subject to
challenge and estimated liabilities
33
are established in the event that these positions are challenged
and the Company is not successful in defending these challenges.
These estimated liabilities are adjusted, as well as the related
interest, in light of changing facts and circumstances, such as
the progress of a tax audit.
An estimated effective tax rate is applied to the Companys
quarterly operating results. In the event there is a significant
unusual or extraordinary item recognized in the Companys
quarterly operating results, the tax attributable to that item
is separately calculated and recorded at the time. Changes in
the Companys estimated effective tax rate during 2007 were
primarily due to changes in its estimate of earnings by tax
jurisdiction, as well as the Companys decision to
repatriate a portion of 2007 international earnings to the
U.S. In addition, changes in judgment related to tax
positions taken in a prior fiscal year, or tax costs or benefits
from a resolution of such positions would be recorded entirely
in the interim period the judgment changes or resolution occurs.
During 2007, the Company recorded a total benefit of $29,999
related to discrete tax events primarily related to the
recognition of previously unrecognized tax benefits and related
reversal of interest.
In certain cases, tax law requires items to be included in the
Companys tax returns at a different time than when these
items are recognized on the financial statements or at a
different amount than that which is recognized on the financial
statements. Some of these differences are permanent, such as
expenses that are not deductible on the Companys tax
returns, while other differences are temporary and will reverse
over time, such as depreciation expense. These differences that
will reverse over time are recorded as deferred tax assets and
liabilities on the consolidated balance sheet. Deferred tax
assets represent credits or deductions that have been reflected
on the financial statements but have not yet been reflected in
the Companys income tax returns. Valuation allowances are
established against deferred tax assets to the extent that it is
determined that the Company will have insufficient future
taxable income, including capital gains, to fully realize the
future credits, deductions or capital losses. Deferred tax
liabilities represent expenses recognized on the Companys
tax return that have not yet been recognized in the
Companys financial statements or income recognized in the
financial statements that has not yet been recognized on the
Companys tax return. During 2007, the Mexican Government
instituted a tax structure which will result in companies paying
the higher of an income-based tax or an alternative flat tax
commencing in 2008. Should the Company be subject to the
alternative flat tax, it would be required to review whether its
net deferred tax assets would be realized. As the Company
believes that it will be subject to the income-based tax in
2008, it believes that the net deferred tax assets related to
the Mexican tax jurisdiction will be realizable. Should the
facts and circumstances change, the Company may be required to
reevaluate deferred tax assets related to its Mexican
operations, which may result in additional tax expense.
Contractual
Obligations and Commercial Commitments
In the normal course of its business, the Company enters into
contracts related to obtaining rights to produce product under
license, which may require the payment of minimum guarantees, as
well as contracts related to the leasing of facilities and
equipment. In addition, the Company has $844,815 in principal
amount of long-term debt outstanding at December 30, 2007,
excluding fair value adjustments. Future payments required under
these and other obligations as of December 30, 2007 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Fiscal Year
|
|
Certain Contractual Obligations
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Total
|
|
|
Long-term debt
|
|
$
|
135,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
709,723
|
|
|
|
844,815
|
|
Interest payments on long-term debt
|
|
|
44,481
|
|
|
|
36,173
|
|
|
|
36,173
|
|
|
|
36,173
|
|
|
|
36,173
|
|
|
|
288,129
|
|
|
|
477,302
|
|
Operating lease commitments
|
|
|
27,236
|
|
|
|
21,650
|
|
|
|
10,828
|
|
|
|
9,793
|
|
|
|
7,262
|
|
|
|
16,165
|
|
|
|
92,934
|
|
Future minimum guaranteed contractual payments
|
|
|
18,354
|
|
|
|
19,691
|
|
|
|
44,645
|
|
|
|
5,125
|
|
|
|
|
|
|
|
|
|
|
|
87,815
|
|
Purchase commitments
|
|
|
249,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
249,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
475,046
|
|
|
|
77,514
|
|
|
|
91,646
|
|
|
|
51,091
|
|
|
|
43,435
|
|
|
|
1,014,017
|
|
|
|
1,752,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
At December 30, 2007, the Company has a liability,
including potential interest and penalties, of $70,571 for
uncertain tax positions that have been taken or expected to be
taken in a tax return. The Company does not know the ultimate
resolution of these liabilities and as such, does not know the
ultimate timing of payments related to this liability.
Included in the Thereafter column above is $249,828 in principal
amount of senior convertible debt due 2021. The holders of these
debentures may put the notes back to the Company in December
2011 and December 2016 at the principal amount. At that time,
the purchase price may be paid in cash, shares of common stock
or a combination of the two. In addition, at December 30,
2007, these debentures may be converted to shares at an initial
conversion price of $21.60 per share through March 31,
2008, at which time the requirements of the contingent
conversion feature will be reevaluated. If the Companys
stock exceeds $23.76 for at least 20 trading days, within the 30
consecutive trading day period ending on the last trading day of
a calendar quarter, or upon other specified events, the
debentures will be convertible at the initial conversion price
of $21.60.
The Companys agreement with MARVEL provides for minimum
guaranteed royalty payments and requires the Company to make
minimum expenditures on marketing and promotional activities.
The future minimum contractual payments include future
guaranteed contractual royalty payments of $35,000 payable to
MARVEL in 2010 that are contingent upon the theatrical release
of SPIDER-MAN 4.
In addition, the Company expects to make contributions totaling
approximately $9,200 to its pension plans in 2008. The Company
also has letters of credit and related instruments of
approximately $70,000 at December 30, 2007.
Financial
Risk Management
The Company is exposed to market risks attributable to
fluctuations in foreign currency exchange rates primarily as the
result of sourcing products priced in U.S. dollars, Hong
Kong dollars and Euros while marketing those products in more
than twenty currencies. Results of operations may be affected
primarily by changes in the value of the U.S. dollar, Hong
Kong dollar, Euro, British pound, Canadian dollar and Mexican
peso and, to a lesser extent, currencies in Latin American and
Asia Pacific countries.
To manage this exposure, the Company has hedged a portion of its
forecasted foreign currency transactions using foreign exchange
forward contracts. The Company estimates that a hypothetical
immediate 10% depreciation of the U.S. dollar against
foreign currencies could result in an approximate $52,400
decrease in the fair value of these instruments. A decrease in
the fair value of these instruments would be substantially
offset by decreases in the related forecasted foreign currency
transaction.
The Company is also exposed to foreign currency risk with
respect to its net cash and cash equivalents or short-term
borrowing positions in currencies other than the
U.S. dollar. The Company believes, however, that the
on-going risk on the net exposure should not be material to its
financial condition. In addition, the Companys revenues
and costs have been and will likely continue to be affected by
changes in foreign currency rates. From time to time, affiliates
of the Company may make or receive intercompany loans in
currencies other than their functional currency. The Company
manages this exposure at the time the loan is made by using
foreign exchange contracts. The Company reflects all derivatives
at their fair value as an asset or liability on the balance
sheet. The Company does not speculate in foreign currency
exchange contracts. At December 30, 2007, these contracts
had unrealized losses of $10,437, of which $6,679 are recorded
in accrued liabilities and $3,758 recorded in other liabilities.
Included in accumulated other comprehensive income at
December 30, 2007 are deferred losses of $11,080, net of
tax.
At December 30, 2007, the Company had fixed rate long-term
debt, excluding fair value adjustments, of $844,815. At
December 30, 2007, the Company had fixed-for-floating
interest rate swaps with notional amounts of $75,000. The
interest rate swaps are designed to adjust a portion of the
Companys debt subject to a fixed interest rate. The
interest rate swaps are matched with specific long-term debt
issues and are designated and effective as hedges of the change
in the fair value of the associated debt. Changes in fair value
of these contracts are wholly offset in earnings by changes in
the fair value of the related long-term debt. At
35
December 30, 2007, these contracts had a fair value of
$256, which was included in other current assets, with a
corresponding fair value adjustment to increase the current
portion of long-term debt. Changes in interest rates affect the
fair value of fixed rate debt not hedged by interest rate swap
agreements while affecting the earnings and cash flows of the
long-term debt hedged by the interest rate swaps. The Company
estimates that a hypothetical one percentage point decrease or
increase in interest rates would increase or decrease the fair
value of this long-term debt by approximately $39,500 or
$35,400, respectively. A hypothetical one percentage point
change in interest rates would increase or decrease 2008 pretax
earnings and cash flows by $379 and $379, respectively.
The
Economy and Inflation
The principal market for the Companys products is the
retail sector. Revenues from the Companys top 5 customers,
all retailers, accounted for approximately 52%, 53%, and 53% of
its consolidated net revenues in 2007, 2006 and 2005,
respectively. In the past three years certain customers in the
retail sector have experienced economic difficulty. The Company
monitors the creditworthiness of its customers and adjusts
credit policies and limits as it deems appropriate.
The Companys revenue pattern continues to show the second
half of the year to be more significant to its overall business
for the full year. In 2007, approximately 66% of the
Companys full year net revenues were recognized in the
second half of the year. Although the Company expects that this
concentration will continue, particularly as more of its
business has shifted to larger customers with order patterns
concentrated in the second half of the year, this concentration
may be less in years where the Company has products related to a
major motion picture release that occurs in the first half of
the year. In 2007, the Company had products related to two major
motion picture releases, SPIDER-MAN 3 in May of 2007 and
TRANSFORMERS in July of 2007. The concentration of sales in the
second half of the year increases the risk of
(a) underproduction of popular items,
(b) overproduction of less popular items, and
(c) failure to achieve tight and compressed shipping
schedules. The business of the Company is characterized by
customer order patterns which vary from year to year largely
because of differences in the degree of consumer acceptance of a
product line, product availability, marketing strategies,
inventory levels, policies of retailers and differences in
overall economic conditions. The trend of larger retailers has
been to maintain lower inventories throughout the year and
purchase a greater percentage of product within or close to the
fourth quarter holiday consumer selling season, which includes
Christmas.
Quick response inventory management practices being used by
retailers result in more orders being placed for immediate
delivery and fewer orders being placed well in advance of
shipment. Retailers are timing their orders so that they are
being filled by suppliers closer to the time of purchase by
consumers. To the extent that retailers do not sell as much of
their year-end inventory purchases during this holiday selling
season as they had anticipated, their demand for additional
product earlier in the following fiscal year may be curtailed,
thus negatively impacting the Companys revenues. In
addition, the bankruptcy or other lack of success of one of the
Companys significant retailers could negatively impact the
Companys future revenues.
The effect of inflation on the Companys operations during
2007 was not significant and the Company will continue its
policy of monitoring costs and adjusting prices, accordingly.
Other
Information
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value
Measurements, (SFAS No. 157) which
defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and expands
disclosures about fair value measurements.
SFAS No. 157 is applicable for the Company as of
December 31, 2007, the first day of fiscal 2008. The FASB
issued FASB Staff Position
FAS 157-b,
Effective Date of FASB Statement No. 157, which
deferred the effective date of the Statement for certain
nonfinancial assets and liabilities until fiscal 2009. The
Company does not expect the adoption of SFAS No. 157
to have a material impact on its consolidated balance sheet and
results of operations.
36
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities
(SFAS No. 159). SFAS No. 159
permits entities to choose to measure many financial instruments
and certain other items at fair value and establishes
presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement
attributes for similar types of assets and liabilities.
SFAS No. 159 is effective for the Company beginning
January 1, 2008. The Company does not expect the adoption
of SFAS No. 159 to have a material impact on its
consolidated balance sheet and results of operations.
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 141 (Revised 2007), Business
Combinations, (SFAS 141R), which makes certain
modifications to the accounting for business combinations. These
changes include (1) the requirement for an acquirer to
recognize all assets acquired and liabilities assumed at their
fair value on the acquisition date; (2) the requirement for
an acquirer to recognize assets or liabilities arising from
contingencies at fair value as of that acquisition date; and
(3) the requirement that an acquirer expense all
acquisition related costs. This Statement is required to be
applied prospectively to business combinations for which the
acquisition date is on or after the beginning of fiscal 2009.
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 160, Noncontrolling
Interests in Consolidated Financial Statements,
(SFAS 160) which requires noncontrolling
(minority) interests in subsidiaries to be initially measured at
fair value and presented as a separate component of
shareholders equity. Current practice is to present
noncontrolling interests as a liability or other item outside of
equity. This Statement is required to be applied prospectively
after the beginning of fiscal 2009, although the presentation
and disclosure requirements are required to be applied on a
retrospective basis. The Company does not expect the adoption of
SFAS No. 160 to have a material impact on its
consolidated balance sheet or results of operations.
The Company is not aware of any material amounts of potential
exposure relating to environmental matters and does not believe
its environmental compliance costs or liabilities to be material
to its operating results or financial position.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
The information required by this item is included in Item 7
of Part II of this Report and is incorporated herein by
reference.
37
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Report of Independent Registered Public Accounting
Firm
The Board of Directors and Shareholders
Hasbro, Inc.:
We have audited the accompanying consolidated balance sheets of
Hasbro, Inc. and subsidiaries as of December 30, 2007 and
December 31, 2006, and the related consolidated statements
of operations, shareholders equity, and cash flows for
each of the fiscal years in the three-year period ended
December 30, 2007. These consolidated financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Hasbro, Inc. and subsidiaries as of
December 30, 2007 and December 31, 2006, and the
results of their operations and their cash flows for each of the
fiscal years in the three-year period ended December 30,
2007, in conformity with U.S. generally accepted accounting
principles.
As discussed in note 8 to the consolidated financial
statements, on January 1, 2007 the Company adopted
Financial Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in Income Taxes. As
discussed in note 10 to the consolidated financial
statements, during the first quarter of 2006, the Company
adopted Statement of Financial Accounting Standards
No. 123(R), Share-Based Payment. As discussed
in note 11 to the consolidated financial statements, during
the fourth quarter of 2006, the Company adopted Statement of
Financial Accounting Standards No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Hasbro, Inc.s internal control over financial reporting as
of December 30, 2007, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated February 26, 2008, expressed
an unqualified opinion on the effectiveness of the
Companys internal control over financial reporting.
/s/ KPMG LLP
Providence, Rhode Island
February 26, 2008
38
HASBRO,
INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 30, 2007 and December 31, 2006
(Thousands of Dollars Except Share Data)
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
774,458
|
|
|
|
715,400
|
|
Accounts receivable, less allowance for doubtful accounts of
$30,600 in 2007 and $27,700 in 2006
|
|
|
654,789
|
|
|
|
556,287
|
|
Inventories
|
|
|
259,081
|
|
|
|
203,337
|
|
Prepaid expenses and other current assets
|
|
|
199,912
|
|
|
|
243,291
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,888,240
|
|
|
|
1,718,315
|
|
Property, plant and equipment, net
|
|
|
187,960
|
|
|
|
181,726
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
471,177
|
|
|
|
469,938
|
|
Other intangibles, net
|
|
|
486,232
|
|
|
|
532,257
|
|
Other
|
|
|
203,454
|
|
|
|
194,669
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
1,160,863
|
|
|
|
1,196,864
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,237,063
|
|
|
|
3,096,905
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
10,201
|
|
|
|
10,582
|
|
Current portion of long-term debt
|
|
|
135,348
|
|
|
|
|
|
Accounts payable
|
|
|
186,202
|
|
|
|
160,015
|
|
Accrued liabilities
|
|
|
555,920
|
|
|
|
735,296
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
887,671
|
|
|
|
905,893
|
|
Long-term debt, excluding current portion
|
|
|
709,723
|
|
|
|
494,917
|
|
Other liabilities
|
|
|
254,577
|
|
|
|
158,205
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,851,971
|
|
|
|
1,559,015
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
Preference stock of $2.50 par value. Authorized
5,000,000 shares; none issued
|
|
|
|
|
|
|
|
|
Common stock of $.50 par value. Authorized
600,000,000 shares; issued 209,694,630 shares in 2007
and 2006
|
|
|
104,847
|
|
|
|
104,847
|
|
Additional paid-in capital
|
|
|
369,092
|
|
|
|
322,254
|
|
Retained earnings
|
|
|
2,261,561
|
|
|
|
2,020,348
|
|
Accumulated other comprehensive earnings
|
|
|
74,938
|
|
|
|
11,186
|
|
Treasury stock, at cost, 64,487,616 shares in 2007 and
49,074,215 shares in 2006
|
|
|
(1,425,346
|
)
|
|
|
(920,745
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
1,385,092
|
|
|
|
1,537,890
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
3,237,063
|
|
|
|
3,096,905
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
39
HASBRO,
INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Fiscal Years Ended in December
(Thousands of Dollars Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net revenues
|
|
$
|
3,837,557
|
|
|
|
3,151,481
|
|
|
|
3,087,627
|
|
Cost of sales
|
|
|
1,576,621
|
|
|
|
1,303,885
|
|
|
|
1,286,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2,260,936
|
|
|
|
1,847,596
|
|
|
|
1,801,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
67,716
|
|
|
|
78,934
|
|
|
|
102,035
|
|
Royalties
|
|
|
316,807
|
|
|
|
169,731
|
|
|
|
247,283
|
|
Research and product development
|
|
|
167,194
|
|
|
|
171,358
|
|
|
|
150,586
|
|
Advertising
|
|
|
434,742
|
|
|
|
368,996
|
|
|
|
366,371
|
|
Selling, distribution and administration
|
|
|
755,127
|
|
|
|
682,214
|
|
|
|
624,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,741,586
|
|
|
|
1,471,233
|
|
|
|
1,490,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
519,350
|
|
|
|
376,363
|
|
|
|
310,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonoperating (income) expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
34,618
|
|
|
|
27,521
|
|
|
|
30,537
|
|
Interest income
|
|
|
(29,973
|
)
|
|
|
(27,609
|
)
|
|
|
(24,157
|
)
|
Other (income) expense, net
|
|
|
52,323
|
|
|
|
34,977
|
|
|
|
(6,772
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonoperating (income) expense
|
|
|
56,968
|
|
|
|
34,889
|
|
|
|
(392
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
462,382
|
|
|
|
341,474
|
|
|
|
310,913
|
|
Income taxes
|
|
|
129,379
|
|
|
|
111,419
|
|
|
|
98,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
333,003
|
|
|
|
230,055
|
|
|
|
212,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.13
|
|
|
|
1.38
|
|
|
|
1.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.97
|
|
|
|
1.29
|
|
|
|
1.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared
|
|
$
|
0.64
|
|
|
|
0.48
|
|
|
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
40
HASBRO,
INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Fiscal Years Ended in December
(Thousands of Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
333,003
|
|
|
|
230,055
|
|
|
|
212,075
|
|
Adjustments to reconcile net earnings to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of plant and equipment
|
|
|
88,804
|
|
|
|
67,773
|
|
|
|
78,097
|
|
Other amortization
|
|
|
67,716
|
|
|
|
78,934
|
|
|
|
102,035
|
|
Loss on impairment of investment
|
|
|
|
|
|
|
2,629
|
|
|
|
|
|
Change in fair value of liabilities potentially settleable in
common stock
|
|
|
44,370
|
|
|
|
31,770
|
|
|
|
(2,080
|
)
|
Deferred income taxes
|
|
|
37,578
|
|
|
|
24,967
|
|
|
|
(24,032
|
)
|
Stock-based compensation
|
|
|
29,402
|
|
|
|
22,832
|
|
|
|
74
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in accounts receivable
|
|
|
(74,941
|
)
|
|
|
(10,708
|
)
|
|
|
39,341
|
|
(Increase) decrease in inventories
|
|
|
(44,267
|
)
|
|
|
(17,623
|
)
|
|
|
10,677
|
|
Decrease (increase) in prepaid expenses and other current assets
|
|
|
79,247
|
|
|
|
(35,174
|
)
|
|
|
74,531
|
|
Increase (decrease) in accounts payable and accrued liabilities
|
|
|
64,936
|
|
|
|
(35,639
|
)
|
|
|
33,211
|
|
Other, including long-term advances
|
|
|
(24,054
|
)
|
|
|
(39,169
|
)
|
|
|
(27,305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
601,794
|
|
|
|
320,647
|
|
|
|
496,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
(91,532
|
)
|
|
|
(82,103
|
)
|
|
|
(70,584
|
)
|
Investments and acquisitions, net of cash acquired
|
|
|
(18,000
|
)
|
|
|
|
|
|
|
(79,179
|
)
|
Proceeds from sale of property, plant and equipment
|
|
|
586
|
|
|
|
1,197
|
|
|
|
33,083
|
|
Purchases of short-term investments
|
|
|
(43,700
|
)
|
|
|
(941,120
|
)
|
|
|
|
|
Proceeds from sales of short-term investments
|
|
|
43,700
|
|
|
|
941,120
|
|
|
|
|
|
Other
|
|
|
(3,519
|
)
|
|
|
(2,698
|
)
|
|
|
(3,991
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash utilized by investing activities
|
|
|
(112,465
|
)
|
|
|
(83,604
|
)
|
|
|
(120,671
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from borrowings with original maturities of more
than three months
|
|
|
346,009
|
|
|
|
|
|
|
|
|
|
Repurchases and repayments of borrowings with original
maturities of more than three months
|
|
|
|
|
|
|
(32,743
|
)
|
|
|
(93,303
|
)
|
Net repayments of other short-term borrowings
|
|
|
(1,150
|
)
|
|
|
(3,726
|
)
|
|
|
(3,685
|
)
|
Purchases of common stock
|
|
|
(584,349
|
)
|
|
|
(456,744
|
)
|
|
|
(48,030
|
)
|
Purchase of Lucas warrants
|
|
|
(200,000
|
)
|
|
|
|
|
|
|
|
|
Stock option transactions
|
|
|
82,661
|
|
|
|
86,257
|
|
|
|
45,278
|
|
Excess tax benefits from stock-based compensation
|
|
|
17,009
|
|
|
|
14,959
|
|
|
|
|
|
Dividends paid
|
|
|
(94,097
|
)
|
|
|
(75,282
|
)
|
|
|
(58,901
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash utilized by financing activities
|
|
|
(433,917
|
)
|
|
|
(467,279
|
)
|
|
|
(158,641
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
3,646
|
|
|
|
3,368
|
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
59,058
|
|
|
|
(226,868
|
)
|
|
|
217,266
|
|
Cash and cash equivalents at beginning of year
|
|
|
715,400
|
|
|
|
942,268
|
|
|
|
725,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
774,458
|
|
|
|
715,400
|
|
|
|
942,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
27,374
|
|
|
|
26,228
|
|
|
|
33,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
123,325
|
|
|
|
84,901
|
|
|
|
32,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes (4) and (10) for disclosure of financing and
investing activities not affecting cash.
See accompanying notes to consolidated financial statements.
41
HASBRO,
INC. AND SUBSIDIARIES
Consolidated
Statements of Shareholders Equity
(Thousands
of Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common
|
|
|
Paid-in
|
|
|
Deferred
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
Shareholders
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Compensation
|
|
|
Earnings
|
|
|
Earnings
|
|
|
Stock
|
|
|
Equity
|
|
|
Balance, December 26, 2004
|
|
$
|
104,847
|
|
|
|
380,745
|
|
|
|
(98
|
)
|
|
|
1,721,209
|
|
|
|
82,388
|
|
|
|
(649,367
|
)
|
|
|
1,639,724
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
212,075
|
|
|
|
|
|
|
|
|
|
|
|
212,075
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67,040
|
)
|
|
|
|
|
|
|
(67,040
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145,035
|
|
Stock option and warrant transactions
|
|
|
|
|
|
|
(22,546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73,496
|
|
|
|
50,950
|
|
Purchases of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48,030
|
)
|
|
|
(48,030
|
)
|
Restricted stock activity
|
|
|
|
|
|
|
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
|
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(64,277
|
)
|
|
|
|
|
|
|
|
|
|
|
(64,277
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 25, 2005
|
|
|
104,847
|
|
|
|
358,199
|
|
|
|
(24
|
)
|
|
|
1,869,007
|
|
|
|
15,348
|
|
|
|
(623,901
|
)
|
|
|
1,723,476
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
230,055
|
|
|
|
|
|
|
|
|
|
|
|
230,055
|
|
Other comprehensive earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,588
|
|
|
|
|
|
|
|
22,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
252,643
|
|
Adjustment to adopt SFAS No. 158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,750
|
)
|
|
|
|
|
|
|
(26,750
|
)
|
Stock option and warrant transactions
|
|
|
|
|
|
|
(58,498
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159,645
|
|
|
|
101,147
|
|
Purchases of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(456,744
|
)
|
|
|
(456,744
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
22,553
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
255
|
|
|
|
22,832
|
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(78,714
|
)
|
|
|
|
|
|
|
|
|
|
|
(78,714
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
104,847
|
|
|
|
322,254
|
|
|
|
|
|
|
|
2,020,348
|
|
|
|
11,186
|
|
|
|
(920,745
|
)
|
|
|
1,537,890
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
333,003
|
|
|
|
|
|
|
|
|
|
|
|
333,003
|
|
Other comprehensive earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,973
|
|
|
|
|
|
|
|
55,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
388,976
|
|
SFAS No. 158 measurement date change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,143
|
)
|
|
|
7,779
|
|
|
|
|
|
|
|
5,636
|
|
Adjustment to adopt FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,358
|
|
|
|
|
|
|
|
|
|
|
|
8,358
|
|
Conversion of debentures
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
136
|
|
|
|
168
|
|
Stock option and warrant transactions
|
|
|
|
|
|
|
17,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,092
|
|
|
|
99,671
|
|
Purchases of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(587,004
|
)
|
|
|
(587,004
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
29,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175
|
|
|
|
29,402
|
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(98,005
|
)
|
|
|
|
|
|
|
|
|
|
|
(98,005
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 30, 2007
|
|
$
|
104,847
|
|
|
|
369,092
|
|
|
|
|
|
|
|
2,261,561
|
|
|
|
74,938
|
|
|
|
(1,425,346
|
)
|
|
|
1,385,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
42
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
(Thousands of Dollars and Shares Except Per Share Data)
|
|
(1)
|
Summary
of Significant Accounting Policies
|
Principles
of Consolidation
The consolidated financial statements include the accounts of
Hasbro, Inc. and all majority-owned subsidiaries
(Hasbro or the Company). Investments
representing 20% to 50% ownership interest in other companies
are accounted for using the equity method. The Company had no
equity method investments at December 30, 2007 that were
material to the consolidated financial statements. All
significant intercompany balances and transactions have been
eliminated.
Preparation
of Financial Statements
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and
notes thereto. Actual results could differ from those estimates.
Reclassifications
Certain amounts in the 2006 and 2005 consolidated financial
statements have been reclassified to conform to the 2007
presentation.
Fiscal
Year
Hasbros fiscal year ends on the last Sunday in December.
The fiscal years ended December 30, 2007 and
December 25, 2005 were fifty-two week periods while the
fiscal year ended December 31, 2006 was a fifty-three week
period.
Cash
and Cash Equivalents
Cash and cash equivalents include all cash balances and highly
liquid investments purchased with a maturity to the Company of
three months or less.
Marketable
Securities
Marketable securities are comprised of investments in
publicly-traded securities, classified as available-for-sale,
and are recorded at fair value with unrealized gains or losses,
net of tax, reported as a component of accumulated other
comprehensive earnings (AOCE) within
shareholders equity until realized. Unrealized losses are
evaluated to determine the nature of the losses. If the losses
are determined to be other than temporary, the basis of the
security is adjusted and the loss is recognized in earnings at
that time. These securities are included in other assets in the
accompanying consolidated balance sheets.
Accounts
Receivable and Allowance for Doubtful Accounts
Credit is granted to customers predominantly on an unsecured
basis. Credit limits and payment terms are established based on
extensive evaluations made on an ongoing basis throughout the
fiscal year with regard to the financial performance, cash
generation, financing availability and liquidity status of each
customer. The majority of customers are reviewed at least
annually; more frequent reviews are performed based on the
customers financial condition and the level of credit
being extended. For customers on credit who are experiencing
financial difficulties, management performs additional financial
analyses before shipping orders. The Company uses a variety of
financial transactions based on availability and cost, to
increase the collectibility of certain of its accounts,
including letters of credit, credit insurance, factoring with
unrelated third parties, and requiring cash in advance of
shipping.
43
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share Data)
The Company records an allowance for doubtful accounts at the
time revenue is recognized based on managements assessment
of the business environment, customers financial
condition, historical collection experience, accounts receivable
aging and customer disputes. When a significant event occurs,
such as a bankruptcy filing by a specific customer, and on a
quarterly basis, the allowance is reviewed for adequacy and the
balance or accrual rate is adjusted to reflect current risk
prospects.
Inventories
Inventories are valued at the lower of cost
(first-in,
first-out) or market. Based upon a consideration of quantities
on hand, actual and projected sales volume, anticipated product
selling price and product lines planned to be discontinued,
slow-moving and obsolete inventory is written down to its
estimated net realizable value.
At December 30, 2007 and December 31, 2006, finished
goods comprised 91% and 92% of inventories, respectively.
Long-Lived
Assets
The Companys long-lived assets consist of property, plant
and equipment, goodwill and intangible assets with indefinite
lives as well as other intangible assets the Company considers
to have a defined life.
Goodwill results from acquisitions the Company has made over
time. Substantially all of the other intangibles consist of the
cost of acquired product rights. In establishing the value of
such rights, the Company considers existing trademarks,
copyrights, patents, license agreements and other
product-related rights. These rights were valued at their
acquisition date based on the anticipated future cash flows from
the underlying product line. The Company has certain intangible
assets related to the Tonka and Milton Bradley acquisitions that
have an indefinite life.
Goodwill and intangible assets deemed to have indefinite lives
are not amortized and are tested for impairment at least
annually. The annual test begins with goodwill and all
intangible assets being allocated to applicable reporting units.
Goodwill is then tested using a two-step process that begins
with an estimation of fair value of the reporting unit using an
income approach, which looks to the present value of expected
future cash flows. The first step is a screen for potential
impairment while the second step measures the amount of
impairment if there is an indication from the first step that
one exists. Intangible assets with indefinite lives are tested
annually for impairment by comparing their carrying value to
their estimated fair value, also calculated using the present
value of expected future cash flows.
The remaining intangibles having defined lives are being
amortized over periods ranging from five to twenty-five years,
primarily using the straight-line method. At December 30,
2007, approximately 8% of other intangibles relate to rights
acquired in connection with a major motion picture entertainment
property and are being amortized over the contract life, in
proportion to projected sales of the licensed products during
the same period.
Property, plant and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and
amortization are computed using accelerated and straight-line
methods to amortize the cost of property, plant and equipment
over their estimated useful lives. The principal lives, in
years, used in determining depreciation rates of various assets
are: land improvements 15 to 19, buildings and improvements 15
to 25 and machinery and equipment 3 to 12. Tools, dies and molds
are amortized over a three-year period or their useful lives,
whichever is less, using an accelerated method. The Company
generally owns all tools, dies and molds related to its products.
44
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share Data)
The Company reviews property, plant and equipment and other
intangibles with defined lives for impairment whenever events or
changes in circumstances indicate the carrying value may not be
recoverable. Recoverability is measured by a comparison of the
carrying amount of an asset or asset group to future
undiscounted cash flows expected to be generated by the asset or
asset group. If such assets were considered to be impaired, the
impairment to be recognized would be measured by the amount by
which the carrying value of the assets exceeds their fair value.
Fair value is determined based on discounted cash flows or
appraised values, depending on the nature of the assets. Assets
to be disposed of are carried at the lower of the net book value
or their estimated fair value less disposal costs.
Financial
Instruments
Hasbros financial instruments include cash and cash
equivalents, accounts receivable, marketable securities, short-
and long-term borrowings, accounts payable and accrued
liabilities. At December 30, 2007, the carrying cost of
these instruments approximated their fair value, with the
exception of the Companys contingent convertible
debentures due 2021. At December 30, 2007, these debentures
had a carrying value of $249,828 and an approximate fair value
of $321,496. The Companys financial instruments also
include foreign currency forwards (see note 13) as
well as interest rate swap agreements (see note 7). At
December 30, 2007, the carrying value of these instruments
was their fair value based on quoted or publicly available
market information.
Securitization
and Transfer of Financial Instruments
Hasbro has an agreement that allows the Company to sell, on an
ongoing basis, an undivided fractional ownership interest in
certain of its trade accounts receivable through a revolving
securitization arrangement. The Company retains servicing
responsibilities for, as well as a subordinate interest in the
transferred receivables. Hasbro accounts for the securitization
of trade accounts receivable as a sale in accordance with
SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of
Liabilities (SFAS 140). As a result, the
related receivables are removed from the consolidated balance
sheet.
Revenue
Recognition
Revenue from product sales is recognized upon the passing of
title to the customer, generally at the time of shipment.
Provisions for discounts, rebates and returns are made when the
related revenues are recognized. The Company bases its estimates
for discounts, rebates and returns on agreed customer terms and
historical experience.
The Company enters into arrangements licensing its brand names
on specifically approved products. The licensees pay the Company
royalties as products are sold, in some cases subject to annual
minimum guaranteed amounts. Royalty revenues are recognized as
they are reported as earned and payment becomes assured, over
the life of the agreement. Revenue from product sales less
related provisions for discounts, rebates and returns, as well
as royalty revenues comprise net revenues in the consolidated
statements of operations.
Royalties
The Company enters into license agreements with inventors,
designers and others for the use of intellectual properties in
its products. These agreements may call for payment in advance
or future payment for minimum guaranteed amounts. Amounts paid
in advance are recorded as an asset and charged to expense as
revenue from the related products is recognized. If all or a
portion of the minimum guaranteed amounts appear not to be
recoverable through future use of the rights obtained under
license, the nonrecoverable portion of the guaranty is charged
to expense at that time.
45
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share Data)
Advertising
Production costs of commercials and programming are charged to
operations in the fiscal year during which the production is
first aired. The costs of other advertising, promotion and
marketing programs are charged to operations in the fiscal year
incurred.
Shipping
and Handling
Hasbro expenses costs related to the shipment and handling of
goods to customers as incurred. For 2007, 2006, and 2005, these
costs were $167,868, $145,729 and $144,953, respectively, and
are included in selling, distribution and administration
expenses.
Operating
Leases
Hasbro records lease expense in such a manner as to recognize
this expense on a straight-line basis inclusive of rent
concessions and rent increases. Reimbursements from lessors for
leasehold improvements are deferred and recognized as a
reduction to lease expense over the lease term.
Income
Taxes
Hasbro uses the asset and liability approach for financial
accounting and reporting of income taxes. Deferred income taxes
have not been provided on the majority of undistributed earnings
of international subsidiaries as the majority of such earnings
are indefinitely reinvested by the Company.
On January 1, 2007, the Company adopted Financial
Accounting Standards Board (FASB) Interpretation
No. 48 (FIN 48), which applies to all tax
positions accounted for under Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes.
FIN 48 prescribes a two step process for the measurement of
uncertain tax positions that have been taken or are expected to
be taken in a tax return. The first step is a determination of
whether the tax position should be recognized in the financial
statements. The second step determines the measurement of the
tax position. FIN 48 also provides guidance on
derecognition of such tax positions, classification, potential
interest and penalties, accounting in interim periods and
disclosure. The Company records potential interest and penalties
on uncertain tax positions as a component of income tax expense.
See note 8 for further information regarding the adoption
of FIN 48.
Foreign
Currency Translation
Foreign currency assets and liabilities are translated into
U.S. dollars at period-end rates, and revenues, costs and
expenses are translated at weighted average rates during each
reporting period. Earnings include gains or losses resulting
from foreign currency transactions and, when required,
translation gains and losses resulting from the use of the
U.S. dollar as the functional currency in highly
inflationary economies. Other gains and losses resulting from
translation of financial statements are a component of other
comprehensive earnings.
Pension
Plans, Postretirement and Postemployment
Benefits
Hasbro, except for certain international subsidiaries, has
pension plans covering substantially all of its full-time
employees. Pension expense is based on actuarial computations of
current and future benefits. In December 2006, the Company
adopted the recognition provisions of Statement of Financial
Accounting Standards No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans (SFAS 158), which amends
SFAS 87, 88, 106 and 132(R). In 2007, the Company adopted
the measurement date provisions of SFAS 158, which required
the Company to change the measurement date of certain of its
defined benefit plans to the Companys fiscal year-end
date. Previously, the measurement date for certain of
46
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share Data)
the Companys defined benefit plans was September 30.
See notes 2 and 11 for the impact of adopting of this
statement.
The Companys policy is to fund amounts which are required
by applicable regulations and which are tax deductible. In 2008,
the Company expects to contribute approximately $9,200 to its
pension plans. The estimated amounts of future payments to be
made under other retirement programs are being accrued currently
over the period of active employment and are also included in
pension expense.
Hasbro has a contributory postretirement health and life
insurance plan covering substantially all employees who retire
under any of its United States defined benefit pension plans and
meet certain age and length of service requirements. It also has
several plans covering certain groups of employees, which may
provide benefits to such employees following their period of
employment but prior to their retirement. The Company measures
the costs of these obligations based on actuarial computations.
Risk
Management Contracts
Hasbro uses foreign currency forward contracts to mitigate the
impact of adverse currency rate fluctuations on firmly committed
and projected future foreign currency transactions. These
over-the-counter contracts, which hedge future purchases of
inventory and other cross-border currency requirements not
denominated in the functional currency of the unit, are
primarily denominated in United States and Hong Kong dollars,
Euros and United Kingdom pound sterling and are entered into
with counterparties who are major financial institutions. The
Company believes that any default by a counterparty would not
have a material adverse effect on the financial condition of the
Company. Hasbro does not enter into derivative financial
instruments for speculative purposes.
At the inception of the contracts, Hasbro designates its
derivatives as either cash flow or fair value hedges. The
Company formally documents all relationships between hedging
instruments and hedged items as well as its risk management
objectives and strategies for undertaking various hedge
transactions. All hedges designated as cash flow hedges are
linked to forecasted transactions and the Company assesses, both
at the inception of the hedge and on an on-going basis, the
effectiveness of the derivatives used in hedging transactions in
offsetting changes in the cash flows of the forecasted
transaction. The ineffective portion of a hedging derivative, if
any, is immediately recognized in the consolidated statements of
operations.
The Company records all derivatives, such as foreign currency
exchange contracts, on the balance sheet at fair value. Changes
in the derivative fair values that are designated effective and
qualify as cash flow hedges are deferred and recorded as a
component of AOCE until the hedged transactions occur and are
then recognized in the consolidated statements of operations.
The Companys foreign currency contracts hedging
anticipated cash flows are designated as cash flow hedges. When
it is determined that a derivative is not highly effective as a
hedge, the Company discontinues hedge accounting prospectively.
Any gain or loss deferred through that date remains in AOCE
until the forecasted transaction occurs, at which time it is
reclassified to the consolidated statements of operations. To
the extent the transaction is no longer deemed probable of
occurring, hedge accounting treatment is discontinued and
amounts deferred would be reclassified to the consolidated
statements of operations. In the event hedge accounting
requirements are not met, gains and losses on such instruments
are included currently in the consolidated statements of
operations. The Company uses derivatives to economically hedge
intercompany loans denominated in foreign currencies. Due to the
short-term nature of the derivative contracts involved, the
Company does not use hedge accounting for these contracts.
The Company also uses interest rate swap agreements to adjust
the amount of long-term debt subject to fixed interest rates.
The interest rate swaps are matched with specific long-term debt
obligations and are designated and effective as fair value
hedges of the change in fair value of those debt obligations.
These
47
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share Data)
agreements are recorded at their fair value as an asset or
liability. Gains and losses on these contracts are included
currently in the consolidated statements of operations and are
wholly offset by changes in the fair value of the related
long-term debt. These hedges are considered to be perfectly
effective under Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended by Statement of Financial
Accounting Standards No. 138 (collectively
SFAS 133). The interest rate swap contracts are
with major financial institutions in order to minimize
counterparty credit risk. The Company believes that any default
by a counterparty would not have a material adverse effect on
the financial condition of the Company.
Accounting
for Stock-Based Compensation
At December 30, 2007, the Company had stock-based employee
compensation plans and plans for non-employee members of the
Companys Board of Directors, which are described more
fully in note 10. Effective December 26, 2005, the
first day of fiscal 2006, the Company adopted Statement of
Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment (SFAS 123R),
which amends Statement of Financial Accounting Standards
No. 123, as amended by No. 148, and Statement of
Financial Accounting Standards No. 95, Statement of
Cash Flows (collectively SFAS 123). The
Company adopted SFAS 123R under the modified prospective
basis as defined in the statement. In 2006, the Company recorded
stock option expense based on all unvested stock options as of
the adoption date as well as all stock-based compensation awards
granted subsequent to the adoption date. See footnote 10 for
further information related to the adoption of this statement.
Prior to 2006, as permitted by SFAS 123, Hasbro accounted
for those plans under the recognition and measurement principles
of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and
related interpretations. As required by the Companys
existing stock plans, stock options are granted at or above the
fair market value of the Companys common stock and,
accordingly, no compensation expense was recognized for these
grants in the consolidated statements of operations prior to
fiscal 2006. Had compensation expense been recorded under the
fair value method as set forth in the provisions of
SFAS 123 for stock options awarded, the Companys
2005 net earnings would have decreased by $15,078 to
$196,997 and basic and diluted EPS would have been $1.10 and
$1.01, respectively.
Net
Earnings Per Common Share
Basic net earnings per share is computed by dividing net
earnings by the weighted average number of shares outstanding
for the year. Diluted net earnings per share is similar except
that the weighted average number of shares outstanding is
increased by dilutive securities, and net earnings are adjusted
for certain amounts related to dilutive securities. Dilutive
securities include shares issuable under convertible debt, as
well as shares issuable upon exercise of stock options and
warrants for which market price exceeds exercise price, less
shares which could have been purchased by the Company with the
related proceeds. Dilutive securities may also include shares
potentially issuable to settle liabilities. Options and warrants
totaling 3,250, 5,148 and 6,018 for 2007, 2006 and 2005,
respectively, were excluded from the calculation of diluted
earnings per share because to include them would have been
antidilutive.
48
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share Data)
A reconciliation of net earnings and average number of shares
for the three fiscal years ended December 30, 2007 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Basic
|
|
|
Diluted
|
|
|
Basic
|
|
|
Diluted
|
|
|
Basic
|
|
|
Diluted
|
|
|
Net earnings
|
|
$
|
333,003
|
|
|
|
333,003
|
|
|
|
230,055
|
|
|
|
230,055
|
|
|
|
212,075
|
|
|
|
212,075
|
|
Change in fair value of liabilities potentially settleable in
common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,080
|
)
|
Interest expense on contingent convertible debentures due 2021,
net of tax
|
|
|
|
|
|
|
4,248
|
|
|
|
|
|
|
|
4,262
|
|
|
|
|
|
|
|
4,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
333,003
|
|
|
|
337,251
|
|
|
|
230,055
|
|
|
|
234,317
|
|
|
|
212,075
|
|
|
|
214,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding
|
|
|
156,054
|
|
|
|
156,054
|
|
|
|
167,100
|
|
|
|
167,100
|
|
|
|
178,303
|
|
|
|
178,303
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities potentially settleable in common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,339
|
|
Contingent convertible debentures due 2021
|
|
|
|
|
|
|
11,568
|
|
|
|
|
|
|
|
11,574
|
|
|
|
|
|
|
|
11,574
|
|
Options and warrants
|
|
|
|
|
|
|
3,583
|
|
|
|
|
|
|
|
2,369
|
|
|
|
|
|
|
|
2,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equivalent shares
|
|
|
156,054
|
|
|
|
171,205
|
|
|
|
167,100
|
|
|
|
181,043
|
|
|
|
178,303
|
|
|
|
197,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share
|
|
$
|
2.13
|
|
|
|
1.97
|
|
|
|
1.38
|
|
|
|
1.29
|
|
|
|
1.19
|
|
|
|
1.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with Emerging Issues Task Force (EITF)
Issue 04-8,
The Effect of Contingently Convertible Instruments on
Diluted Earnings per Share, the net earnings per share
calculations for the three years ended December 30, 2007
include adjustments to add back to earnings the interest
expense, net of tax, incurred on the Companys Senior
Convertible Debentures due 2021, as well as to add back to
outstanding shares the amount of shares potentially issuable as
if the contingent conversion features were met. See note 7
for further information on the contingent conversion feature.
Certain warrants containing a put feature that may be settled in
cash or common stock were required to be accounted for as a
liability at fair value. These warrants were repurchased by the
Company in May of 2007. Prior to their repurchase, the Company
was required to assess if these warrants, classified as a
liability, had a more dilutive impact on earnings per share when
treated as an equity contract. For the years ended
December 30, 2007 and December 31, 2006, the warrants
had a more dilutive impact on earnings per share assuming they
were treated as a liability and no adjustments to net earnings
or equivalent shares was required. For the year ended
December 25, 2005, the warrants had a more dilutive impact
on earnings per share assuming they were treated as an equity
contract. Accordingly for 2005, the numerator includes an
adjustment to net earnings for the income included therein
related to the fair market value adjustment and the denominator
includes an adjustment for the shares issuable as of that date.
49
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share Data)
|
|
(2)
|
Other
Comprehensive Earnings
|
The Companys other comprehensive earnings (loss) for the
years 2007, 2006 and 2005 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Foreign currency translation adjustments
|
|
$
|
35,888
|
|
|
|
26,429
|
|
|
|
(68,530
|
)
|
Changes in value of available-for-sale securities, net of tax
|
|
|
221
|
|
|
|
(2,497
|
)
|
|
|
838
|
|
Gains (losses) on cash flow hedging activities, net of tax
|
|
|
(15,851
|
)
|
|
|
(7,412
|
)
|
|
|
6,460
|
|
Change in unrecognized pension and postretirement amounts,
net of tax
|
|
|
27,393
|
|
|
|
|
|
|
|
|
|
Minimum pension liability adjustment, net of tax
|
|
|
|
|
|
|
1,991
|
|
|
|
(7,813
|
)
|
Reclassifications to earnings, net of tax
|
|
|
8,322
|
|
|
|
4,077
|
|
|
|
2,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive earnings (loss)
|
|
$
|
55,973
|
|
|
|
22,588
|
|
|
|
(67,040
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustments from other comprehensive earnings
to earnings in 2007, 2006 and 2005 were net of related income
taxes of $1,412, $85, and $89, respectively. The
reclassification adjustment for 2007 includes a realized gain of
$(664) on the sale of available-for-sale securities and
amortization, net of tax, of unrecognized pension and
postretirement amounts of $2,099. The reclassification
adjustment for 2006 includes an impairment charge relating to
other than temporary decreases in the value of the
Companys
available-for-sale
securities. In accordance with Hasbros marketable
securities accounting policy, as the result of the decline in
the fair value of the Companys investment in Infogrames
Entertainment SA common stock, the Company adjusted the basis of
this investment and recorded a pretax charge to earnings in the
amount of $2,629 in 2006. The remainder of the reclassification
adjustments in 2007 and 2006, as well as the 2005
reclassification adjustment, include net losses on cash flow
hedging derivatives for which the related transaction has
impacted earnings and was reflected in cost of sales.
The related tax benefit (expense) of other comprehensive
earnings items was $16,064, $273, and $3,960 for the years 2007,
2006, and 2005, respectively.
In the first quarter of 2007, in accordance with
SFAS No. 158, the Company changed its measurement date
for certain of its defined benefit pension plans and its
postretirement plan from September 30 to the Companys
fiscal year-end date. As a result of this change, the assets and
liabilities of these plans were remeasured as of
December 31, 2006, the 2006 fiscal year end date of the
Company. This remeasurement resulted in an adjustment to
accumulated other comprehensive earnings of $7,779 net of
taxes of $4,765, during the first quarter of 2007.
At December 31, 2006, the Company adopted the recognition
provisions of SFAS 158, which required the Company to
recognize the funded status of defined benefit pension and
postretirement plans as an asset or liability in its statement
of financial position and to recognize changes in that funded
status in the year in which the changes occur through
comprehensive income. The adoption of this statement resulted in
an adjustment of $(26,750) to accumulated other comprehensive
income at December 31, 2006.
50
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share Data)
Components of accumulated other comprehensive earnings at
December 30, 2007 and December 31, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Foreign currency translation adjustments
|
|
$
|
104,872
|
|
|
|
68,984
|
|
Changes in value of available-for-sale securities, net of tax
|
|
|
1,489
|
|
|
|
1,932
|
|
Gains (losses) on cash flow hedging activities, net of tax
|
|
|
(11,080
|
)
|
|
|
(2,116
|
)
|
Unrecognized pension and postretirement amounts, net of tax
|
|
|
(20,343
|
)
|
|
|
(57,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
74,938
|
|
|
|
11,186
|
|
|
|
|
|
|
|
|
|
|
|
|
(3)
|
Property,
Plant and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Land and improvements
|
|
$
|
6,940
|
|
|
|
6,623
|
|
Buildings and improvements
|
|
|
192,928
|
|
|
|
186,519
|
|
Machinery and equipment
|
|
|
344,967
|
|
|
|
318,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
544,835
|
|
|
|
511,977
|
|
Less accumulated depreciation
|
|
|
401,272
|
|
|
|
378,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143,563
|
|
|
|
132,998
|
|
Tools, dies and molds, net of amortization
|
|
|
44,397
|
|
|
|
48,728
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
187,960
|
|
|
|
181,726
|
|
|
|
|
|
|
|
|
|
|
Expenditures for maintenance and repairs which do not materially
extend the life of the assets are charged to operations.
|
|
(4)
|
Goodwill
and Intangibles
|
Goodwill and certain intangible assets relating to rights
obtained in the Companys acquisition of
Milton Bradley in 1984 and Tonka in 1991 are not amortized.
These rights were determined to have indefinite lives and total
approximately $75,700. The Companys other intangible
assets are amortized over their remaining useful lives, and
accumulated amortization of these other intangibles is reflected
in other intangibles, net in the accompanying consolidated
balance sheets.
The Company performs an annual impairment test for goodwill and
intangible assets with indefinite lives. This annual impairment
test is performed in the fourth quarter of the Companys
fiscal year. In addition, if an event occurs or circumstances
change that indicate that the carrying value may not be
recoverable, the Company will perform an interim impairment test
at that time. For the three fiscal years ended December 30,
2007, no such events occurred. The Company completed its annual
impairment tests in the fourth quarters of 2007, 2006 and 2005,
which indicated that there was no impairment.
A portion of the Companys goodwill and other intangible
assets reside in the Corporate segment of the business. For
purposes of testing pursuant to Statement of Financial
Accounting Standards No. 142, Goodwill and Other
Intangible Assets, these assets are allocated to the
reporting units within the Companys operating
51
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share Data)
segments. Changes in carrying amount of goodwill, by operating
segment for the years ended December 30, 2007 and
December 31, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
|
|
|
|
|
|
|
|
|
|
America
|
|
|
International
|
|
|
Total
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
$
|
294,378
|
|
|
|
175,560
|
|
|
|
469,938
|
|
Foreign exchange translation
|
|
|
|
|
|
|
1,239
|
|
|
|
1,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 30, 2007
|
|
$
|
294,378
|
|
|
|
176,799
|
|
|
|
471,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 25, 2005
|
|
$
|
294,378
|
|
|
|
172,683
|
|
|
|
467,061
|
|
Foreign exchange translation
|
|
|
|
|
|
|
2,877
|
|
|
|
2,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
$
|
294,378
|
|
|
|
175,560
|
|
|
|
469,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the Companys other intangibles, net at
December 30, 2007 and December 31, 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Acquired product rights
|
|
$
|
925,092
|
|
|
|
903,182
|
|
Licensed rights of entertainment properties
|
|
|
211,555
|
|
|
|
211,555
|
|
Accumulated amortization
|
|
|
(726,153
|
)
|
|
|
(658,218
|
)
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets
|
|
|
410,494
|
|
|
|
456,519
|
|
Product rights with indefinite lives
|
|
|
75,738
|
|
|
|
75,738
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
486,232
|
|
|
|
532,257
|
|
|
|
|
|
|
|
|
|
|
In July 2007, with the exception of rights to
DUNGEONS & DRAGONS, the Company reacquired the
remaining digital gaming rights for its owned or controlled
properties held by Infogrames Entertainment SA (Infogrames). The
acquisition price of $19,000 included $18,000 in cash and $1,000
of non-cash consideration in the form of the return of
39 shares of preferred stock held by the Company in a
subsidiary of Infogrames. These rights were previously held by
Infogrames on an exclusive basis as a result of a license
agreement. The consideration to reacquire these rights, which
represents fair value, is included as a component of other
intangible assets in the consolidated balance sheet and is being
amortized over a period of approximately 5 years.
The Company will continue to incur amortization expense related
to the use of acquired and licensed rights to produce various
products. The amortization of these product rights will
fluctuate depending on related projected revenues during an
annual period, as well as rights reaching the end of their
useful lives. The Company currently estimates continuing
amortization expense for the next five years to be approximately:
|
|
|
|
|
2008
|
|
$
|
71,000
|
|
2009
|
|
|
69,000
|
|
2010
|
|
|
42,000
|
|
2011
|
|
|
40,100
|
|
2012
|
|
|
40,200
|
|
Subsequent to December 30, 2007, the Company announced that
it had agreed to acquire Cranium, Inc. (Cranium) for
a base purchase price of $77,500, subject to adjustment based on
the preliminary amount of
52
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share Data)
Craniums net assets on the closing date. The acquisition
closed on January 25, 2008. Based on the amount of
Craniums net assets as of the closing date, the adjusted
purchase price, which may be subject to further adjustment,
totaled approximately $69,000.
|
|
(5)
|
Financing
Arrangements
|
Short-Term
Borrowings
At December 30, 2007, Hasbro had available an unsecured
committed line and unsecured uncommitted lines of credit from
various banks approximating $300,000 and $194,100, respectively.
All of the short-term borrowings outstanding at the end of 2007,
and a significant portion of the short-term borrowings
outstanding at the end of 2006, represent borrowings made under,
or supported by, these lines of credit. The weighted average
interest rates of the outstanding borrowings as of
December 30, 2007 and December 31, 2006 were 5.5% and
4.7%, respectively. The Company had no borrowings outstanding
under its committed line of credit at December 30, 2007.
During 2007, Hasbros working capital needs were fulfilled
by cash generated from operations, the Companys accounts
receivable securitization program, and borrowings under lines of
credit. Borrowings under the lines of credit were on terms and
at interest rates generally extended to companies of comparable
creditworthiness.
The unsecured committed line (the Agreement)
provides the Company with a $300,000 committed borrowing
facility through June 2011. The Company has the ability to
request increases in the committed facility in additional
increments of at least $50,000, up to a total committed facility
of $500,000. The Agreement contains certain financial covenants
setting forth leverage and coverage requirements, and certain
other limitations typical of an investment grade facility,
including with respect to liens, mergers and incurrence of
indebtedness. The Company was in compliance with all covenants
as of and for the year ended December 30, 2007.
The Company pays a commitment fee (0.10% as of December 30,
2007) based on the unused portion of the facility and
interest equal to LIBOR or Prime plus a spread on borrowings
under the facility. The commitment fee and the amount of the
spread to LIBOR or Prime both vary based on the Companys
long-term debt ratings and the Companys leverage. At
December 30, 2007, the interest rate under the facility was
equal to LIBOR plus 0.50% or Prime.
Securitization
The Company is party to a receivable securitization program
whereby the Company sells, on an ongoing basis, substantially
all of its U.S. trade accounts receivable to a
bankruptcy-remote, special purpose subsidiary, Hasbro
Receivables Funding, LLC (HRF), which is wholly-owned and
consolidated by the Company. HRF will, subject to certain
conditions, sell, from time to time on a revolving basis, an
undivided fractional ownership interest in up to $250,000 of
eligible domestic receivables to various multi-party commercial
paper conduits supported by a committed liquidity facility.
During the period from the first day of October fiscal month
through the last day of the following January fiscal month, this
limit is increased to $300,000. Under the terms of the
agreement, new receivables are added to the pool as collections
reduce previously held receivables. The Company expects to
service, administer, and collect the receivables on behalf of
HRF and the conduits. The net proceeds of sale will be less than
the face amount of accounts receivable sold by an amount that
approximates the purchasers financing costs.
The receivables facility contains certain restrictions on the
Company and HRF that are customary for facilities of this type.
The commitments under the facility are subject to termination
prior to their term upon the occurrence of certain events,
including payment defaults, breach of covenants, breach of
representations or warranties, bankruptcy, and failure of the
receivables to satisfy certain performance criteria.
53
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share Data)
As of December 30, 2007 and December 31, 2006 the
utilization of the receivables facility was $250,000. As of
December 30, 2007 and December 31, 2006 the Company
had an additional $16,550 and $50,000, respectively, available
to sell under the facility. The transactions are accounted for
as sales under SFAS 140. During 2007, 2006 and 2005, the
loss on the sale of the receivables totaled $7,982, $2,241 and
$6,925, respectively, which is recorded in selling, distribution
and administration expenses in the accompanying consolidated
statements of operations. The discount on interests sold is
approximately equal to the interest rate paid by the conduits to
the holders of the commercial paper plus other fees. The
discount rate as of December 30, 2007 was approximately
5.78%.
Upon sale to the conduits, HRF continues to hold a subordinated
retained interest in the receivables. The subordinated interest
in receivables is recorded at fair value, which is determined
based on the present value of future expected cash flows
estimated using managements best estimates of credit
losses and discount rates commensurate with the risks involved.
Due to the short-term nature of trade receivables, the carrying
amount, less allowances, approximates fair value. Variations in
the credit and discount assumptions would not significantly
impact fair value.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Liabilities potentially settleable in common stock
|
|
$
|
|
|
|
|
155,630
|
|
Royalties
|
|
|
98,767
|
|
|
|
76,695
|
|
Advertising
|
|
|
100,883
|
|
|
|
74,781
|
|
Payroll and management incentives
|
|
|
78,809
|
|
|
|
76,653
|
|
Income taxes
|
|
|
10,137
|
|
|
|
121,254
|
|
Other
|
|
|
267,324
|
|
|
|
230,283
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
555,920
|
|
|
|
735,296
|
|
|
|
|
|
|
|
|
|
|
The Company had a warrant amendment agreement with Lucasfilm
Ltd. and Lucas Licensing Ltd. (together Lucas) that
provided the Company with a call option through October 13,
2016 to purchase the warrants from Lucas for a price to be paid
at the Companys election of either $200,000 in cash or the
equivalent of $220,000 in shares of the Companys common
stock, such stock being valued at the time of the exercise of
the option. Also, the warrant amendment agreement provided Lucas
with a put option through January 2008 to sell all of these
warrants to the Company for a price to be paid at the
Companys election of either $100,000 in cash or the
equivalent of $110,000 in shares of the Companys common
stock, such stock being valued at the time of the exercise of
the option. In May 2007 the Company exercised its call option to
repurchase all of the outstanding warrants for the
Companys common stock held by Lucas and paid $200,000 in
cash and repurchased the warrants. At the time of the call Lucas
held exercisable warrants to purchase an aggregate of
15,750 shares of the Companys common stock.
Prior to exercising the call option, the Company adjusted these
warrants to their fair value through earnings at the end of each
reporting period. During 2007 and 2006, the Company recorded
other expense of $44,370 and $31,770, respectively, and during
2005 the Company recorded other income of $(2,080) to adjust the
warrants to their fair value. These amounts are included in
other (income) expense, net in the consolidated statement of
operations. There was no tax benefit or expense associated with
these fair value adjustments.
54
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share Data)
Components of long-term debt are as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
6.15% Notes Due 2008
|
|
$
|
135,092
|
|
|
|
135,092
|
|
6.30% Notes Due 2017
|
|
|
350,000
|
|
|
|
|
|
2.75% Debentures Due 2021
|
|
|
249,828
|
|
|
|
249,996
|
|
6.60% Notes Due 2028
|
|
|
109,895
|
|
|
|
109,895
|
|
|
|
|
|
|
|
|
|
|
Total principal amount of long-term debt
|
|
|
844,815
|
|
|
|
494,983
|
|
Fair value adjustment related to interest rate swaps
|
|
|
256
|
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
845,071
|
|
|
|
494,917
|
|
Less current portion
|
|
|
135,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt excluding current portion
|
|
$
|
709,723
|
|
|
|
494,917
|
|
|
|
|
|
|
|
|
|
|
The schedule of contractual maturities of long-term debt for the
next five years and thereafter is as follows:
|
|
|
|
|
2008
|
|
$
|
135,092
|
|
2009
|
|
|
|
|
2010
|
|
|
|
|
2011
|
|
|
|
|
2012
|
|
|
|
|
Thereafter
|
|
|
709,723
|
|
|
|
|
|
|
|
|
$
|
844,815
|
|
|
|
|
|
|
In September 2007 the Company issued $350,000 of notes that are
due in 2017 (the Notes). The Notes bear interest at
a rate of 6.30%, which may be adjusted upward in the event that
the Companys credit rating from Moodys Investor
Services, Inc., Standard & Poors Ratings
Services or Fitch Ratings is decreased two levels below the
Companys credit ratings on the date of issuance of the
Notes. From the date of issuance through December 30, 2007,
the Companys ratings from Moodys Investor Services,
Inc., Standard & Poors Ratings Services and
Fitch Ratings were BBB, Baa2 and BBB, respectively. The interest
rate adjustment is dependent on the degree of decrease of the
Companys ratings and could range from 0.25% to a maximum
of 2%. The Company may redeem the Notes at its option at the
greater of the principal amount of the Notes or the present
value of the remaining scheduled payments discounted using the
effective interest rate on applicable U.S. Treasury bills
at the time of repurchase.
The Company currently has $249,828 outstanding in principal
amount of contingent convertible debentures due 2021. These
debentures bear interest at 2.75%, which could be subject to an
upward adjustment depending on the price of the Companys
stock. If the closing price of the Companys stock exceeds
$23.76 for at least 20 trading days, within the 30 consecutive
trading day period ending on the last trading day of the
calendar quarter, the holders have the right to convert the
notes to shares of the Companys common stock at the
initial conversion price of $21.60 in the next calendar quarter.
At December 30, 2007, this contingent conversion feature
was met and the debentures are convertible through
March 31, 2008, at which time the requirements of the
contingent conversion feature will be reevaluated. In addition,
if the closing price of the Companys stock exceeds $27.00
for at least 20 trading days in any thirty day period, the
Company has the right to call the debentures by giving notice to
the holders of the debentures. During a
55
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share Data)
prescribed notice period, the holders of the debentures have the
right to convert their debentures in accordance with the
conversion terms described above. The holders of these
debentures may also put the notes back to Hasbro in December
2011 and December 2016. At these times, the purchase price may
be paid in cash, shares of common stock or a combination of the
two, at the discretion of the Company.
In 2006, the Company repaid in principal amount $32,743 of
8.50% notes due in March 2006.
The Company is a party to interest rate swap agreements in order
to adjust the amount of total debt that is subject to fixed
interest rates. The interest rate swaps are matched with
specific long-term debt obligations and accounted for as fair
value hedges of those debt obligations. At December 30,
2007, these interest rate swaps had a total notional amount of
$75,000 with maturities in 2008. In each of the contracts, the
Company receives payments based upon a fixed interest rate that
matches the interest rate of the debt being hedged and makes
payments based upon a floating rate based on LIBOR. These
contracts are designated and effective as hedges of the change
in the fair value of the associated debt. At December 30,
2007, these contracts had unrealized gains of $256, which were
included in other current assets, with a corresponding fair
value adjustment to increase the current portion of long-term
debt.
Income taxes attributable to earnings before income taxes are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
34,443
|
|
|
|
34,049
|
|
|
|
76,642
|
|
State and local
|
|
|
5,497
|
|
|
|
3,203
|
|
|
|
7,147
|
|
International
|
|
|
51,861
|
|
|
|
49,200
|
|
|
|
39,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,801
|
|
|
|
86,452
|
|
|
|
122,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
33,707
|
|
|
|
24,912
|
|
|
|
(20,611
|
)
|
State and local
|
|
|
2,889
|
|
|
|
2,135
|
|
|
|
(1,767
|
)
|
International
|
|
|
982
|
|
|
|
(2,080
|
)
|
|
|
(1,654
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,578
|
|
|
|
24,967
|
|
|
|
(24,032
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
129,379
|
|
|
|
111,419
|
|
|
|
98,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain income tax benefits (expenses), not reflected in income
taxes in the statements of operations totaled ($2,542) in 2007,
$27,876 in 2006, and $8,426 in 2005. These income tax benefits
(expenses) relate primarily to pension amounts recorded in AOCE
and stock options. In 2007, 2006, and 2005, the deferred tax
portion of the total benefit (expense) was ($20,163), $12,917,
and $4,563, respectively.
56
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share Data)
A reconciliation of the statutory United States federal income
tax rate to Hasbros effective income tax rate is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Statutory income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State and local income taxes, net
|
|
|
1.1
|
|
|
|
1.2
|
|
|
|
0.8
|
|
One time dividend
|
|
|
|
|
|
|
|
|
|
|
8.3
|
|
International earnings not indefinitely reinvested
|
|
|
4.4
|
|
|
|
|
|
|
|
|
|
Tax on international earnings
|
|
|
(10.9
|
)
|
|
|
(9.7
|
)
|
|
|
(12.2
|
)
|
Fair value adjustment of Lucas warrants
|
|
|
3.4
|
|
|
|
3.3
|
|
|
|
(0.2
|
)
|
Change in valuation allowance
|
|
|
|
|
|
|
0.8
|
|
|
|
|
|
Exam settlements and statute expirations
|
|
|
(6.5
|
)
|
|
|
1.5
|
|
|
|
(1.4
|
)
|
Other, net
|
|
|
1.5
|
|
|
|
0.5
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28.0
|
%
|
|
|
32.6
|
%
|
|
|
31.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2007, the Company designated $90,000 of current year
international net earnings that will not be indefinitely
reinvested outside of the U.S. The incremental income tax
on this amount, representing the difference between the
U.S. federal income tax rate and the income tax rates in
the applicable international jurisdictions, is a component of
deferred income tax expense.
On October 22, 2004, the American Jobs Creation Act of 2004
(the Act) was signed into law. The Act created a
one-time incentive for U.S. corporations to repatriate
undistributed earnings from their international subsidiaries by
providing an 85% dividends-received deduction for certain
international earnings. The deduction was available to
corporations during the tax year that includes October 22,
2004 or in the immediately subsequent tax year. In the fourth
quarter of 2005, the Companys Board of Directors approved
a plan to repatriate approximately $547,000 in foreign earnings,
which was completed in December 2005. The tax expense related to
this repatriation was $25,844.
The components of earnings before income taxes, determined by
tax jurisdiction, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
United States
|
|
$
|
165,274
|
|
|
|
113,761
|
|
|
|
98,180
|
|
International
|
|
|
297,108
|
|
|
|
227,713
|
|
|
|
212,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
462,382
|
|
|
|
341,474
|
|
|
|
310,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share Data)
The components of deferred income tax expense arise from various
temporary differences and relate to items included in the
statements of operations. The tax effects of temporary
differences that give rise to significant portions of the
deferred tax assets and liabilities at December 30, 2007
and December 31, 2006 are:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
20,524
|
|
|
|
19,287
|
|
Inventories
|
|
|
24,608
|
|
|
|
17,860
|
|
Losses and tax credit carryforwards
|
|
|
39,094
|
|
|
|
34,405
|
|
Operating expenses
|
|
|
42,759
|
|
|
|
62,392
|
|
Pension
|
|
|
9,990
|
|
|
|
27,663
|
|
Deferred compensation and stock options
|
|
|
24,477
|
|
|
|
16,251
|
|
Postretirement benefits
|
|
|
13,507
|
|
|
|
14,128
|
|
Other
|
|
|
37,274
|
|
|
|
26,453
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
212,233
|
|
|
|
218,439
|
|
Valuation allowance
|
|
|
(36,254
|
)
|
|
|
(27,808
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
175,979
|
|
|
|
190,631
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Convertible debentures
|
|
|
40,185
|
|
|
|
32,149
|
|
International earnings not indefinitely reinvested
|
|
|
20,422
|
|
|
|
|
|
Depreciation and amortization of long-lived assets
|
|
|
15,833
|
|
|
|
9,658
|
|
Other
|
|
|
2,408
|
|
|
|
655
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
78,848
|
|
|
|
42,462
|
|
|
|
|
|
|
|
|
|
|
Net deferred income taxes
|
|
$
|
97,131
|
|
|
|
148,169
|
|
|
|
|
|
|
|
|
|
|
Hasbro has a valuation allowance for deferred tax assets at
December 30, 2007 of $36,254, which is an increase of
$8,446 from $27,808 at December 31, 2006. The valuation
allowance pertains to United States and International loss
carryforwards, some of which have no expiration and others that
would expire beginning in 2008. The increase in the valuation
allowance is primarily attributable to the additional deferred
tax assets related to potential capital losses. If the operating
loss carryforwards are fully realized, $158 will reduce goodwill
and the balance will reduce future income tax expense.
Based on Hasbros history of taxable income and the
anticipation of sufficient taxable income in years when the
temporary differences are expected to become tax deductions, it
believes that it will realize the benefit of the deferred tax
assets, net of the existing valuation allowance.
Deferred income taxes of $53,040 and $83,854 at the end of 2007
and 2006, respectively, are included as a component of prepaid
expenses and other current assets, and $45,855 and $66,276,
respectively, are included as a component of other assets. At
the same dates, deferred income taxes of $81 and $122,
respectively, are included as a component of accrued
liabilities, and $1,683 and $1,839, respectively, are included
as a component of other liabilities.
On January 1, 2007, the Company adopted FIN 48, which
applies to all tax positions accounted for under Statement of
Financial Accounting Standards No. 109, Accounting
for Income Taxes. FIN 48 prescribes a two step
process for the measurement of uncertain tax positions that have
been taken or are expected to be taken in a tax return. The
first step is a determination of whether the tax position should
be recognized in the
58
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share Data)
financial statements. The second step determines the measurement
of the tax position. FIN 48 also provides guidance on
derecognition of such tax positions, classification, potential
interest and penalties, accounting in interim periods and
disclosure. The adoption of FIN 48 resulted in a $88,798
decrease in current liabilities, a $85,773 increase in long-term
liabilities, a $5,333 increase to the long-term deferred tax
assets and a $8,358 increase to retained earnings.
A reconciliation of unrecognized tax benefits, excluding
potential interest and penalties, for the fiscal year ended
December 30, 2007 is as follows:
|
|
|
|
|
Balance at January 1, 2007
|
|
$
|
72,878
|
|
Gross increases in prior period tax positions
|
|
|
1,980
|
|
Gross decreases in prior period tax positions
|
|
|
(889
|
)
|
Gross increases in current period tax positions
|
|
|
12,840
|
|
Decreases related to settlements with tax authorities
|
|
|
(633
|
)
|
Decreases from the expiration of statute of limitations
|
|
|
(27,321
|
)
|
|
|
|
|
|
Balance at December 30, 2007
|
|
$
|
58,855
|
|
|
|
|
|
|
If the $58,855 is recognized, approximately $51,500 would
decrease the effective tax rate in the period in which each of
the benefits is recognized. Of the remaining amount, $5,700
would reduce intangible assets while the remainder would be
offset by the reversal of related deferred tax assets.
During 2007, the Company recognized $4,628 of potential interest
and penalties, which are included as a component of income tax
in the accompanying statement of operations. At
December 30, 2007, the Company had accrued potential
interest and penalties of $12,020.
The Company and its subsidiaries file income tax returns in the
United States and various state and international jurisdictions.
In the normal course of business, the Company is regularly
audited by U.S. federal, state and local and international
tax authorities in various tax jurisdictions. The Company is no
longer subject to U.S. federal tax examinations for years
before 2004. With few exceptions, the Company is no longer
subject to U.S. state or local and
non-U.S. income
tax examinations by tax authorities in its major jurisdictions
for years before 2002. Of the $27,321 of decreases related to
expirations of statutes of limitations noted above, $26,982
relates to the recently completed examinations of the 2002 and
2003 U.S. federal income tax returns. Including the
reversal of $7,710 of potential interest, the Company recognized
$34,692 of previously unrecognized tax benefits during 2007,
primarily related to the deductibility of certain expenses and
tax treatment of certain subsidiary and other transactions. Of
this amount, $29,619 was recorded as a reduction of income tax
expense, $2,932 was recorded as a reduction of deferred tax
assets, and $2,141 was recorded as a decrease to other
intangibles.
The U.S. Internal Revenue Service has recently commenced an
examination related to the 2004 and 2005 U.S. federal
income tax returns. The Company is also under income tax
examination in Mexico and in several other state and foreign
jurisdictions. The ultimate resolution of the U.S. and
Mexican examinations, including matters that may be resolved
within the next twelve months, is not yet determinable. Upon the
settlements of other examinations in various tax jurisdictions
and the expiration of several statutes of limitation, the
Company believes that it is reasonably possible that the
unrecognized tax benefits and related accrued interest may
decrease by up to approximately $3,500 in the next
12 months.
The cumulative amount of undistributed earnings of Hasbros
international subsidiaries held for reinvestment is
approximately $744,000 at December 30, 2007. In the event
that all international undistributed earnings were remitted to
the United States, the amount of incremental taxes would be
approximately $154,000.
59
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share Data)
Preference
Share Purchase Rights
Hasbro maintains a Preference Share Purchase Rights Plan (the
Rights Plan). Under the terms of the Rights Plan,
each share of common stock is accompanied by a Preference Share
Purchase Right (Right). Each Right is only
exercisable under certain circumstances and, until exercisable,
the Rights are not transferable apart from Hasbros common
stock. When exercisable, each Right will entitle its holder to
purchase until June 30, 2009, in certain merger or other
business combination or recapitalization transactions, at the
Rights then current exercise price, a number of the
acquiring companys or Hasbros, as the case may be,
common shares having a market value at that time of twice the
Rights exercise price. Under certain circumstances, the
Company may substitute cash, other assets, equity securities or
debt securities for the common stock. At the option of the Board
of Directors of Hasbro (the Board), the rightholder
may, under certain circumstances, receive shares of
Hasbros stock in exchange for Rights.
Prior to the acquisition by a person or group of beneficial
ownership of a certain percentage of Hasbros common stock,
the Rights are redeemable for $0.01 per Right. The Rights Plan
contains certain exceptions with respect to the Hassenfeld
family and related entities.
Common
Stock
In August 2007, the Companys Board of Directors authorized
the repurchase of up to $500,000 in common stock after two
previous authorizations dated May 2005 and July 2006 of $350,000
each were fully utilized. Purchases of the Companys common
stock may be made from time to time, subject to market
conditions, and may be made in the open market or through
privately negotiated transactions. The Company has no obligation
to repurchase shares under the authorization and the timing,
actual number, and the value of the shares which are repurchased
will depend on a number of factors, including the price of the
Companys common stock. This authorization replaces all
prior authorizations. In 2007, the Company repurchased
20,795 shares at an average price of $28.20. The total cost
of these repurchases, including transaction costs, was $587,004.
At December 30, 2007, $109,601 remained under this
authorization.
Subsequent to December 30, 2007, the Companys Board
of Directors authorized the repurchase of up to an additional
$500,000 in common stock.
|
|
(10)
|
Stock
Options, Other Stock Awards and Warrants
|
Hasbro has reserved 21,997 shares of its common stock for
issuance upon exercise of options and the grant of other awards
granted or to be granted under stock incentive plans for
employees and for non-employee members of the Board of Directors
(collectively, the plans). These options generally
vest in equal annual amounts over three to five years. The plans
provide that options be granted at exercise prices not less than
fair market value on the date the option is granted and options
are adjusted for such changes as stock splits and stock
dividends. Generally, options are exercisable for periods of no
more than ten years after date of grant. Certain of the plans
permit the granting of awards in the form of stock options,
stock appreciation rights, stock awards and cash awards in
addition to options. Upon exercise in the case of stock options,
grant in the case of restricted stock or vesting in the case of
performance based contingent stock grants, shares are issued out
of available treasury shares.
The Company on occasion will issue restricted stock and grant
deferred restricted stock units to certain key employees. In
2007 and 2006, the Company issued restricted stock and
restricted stock units of 12 and 20 shares, respectively.
No restricted stock or deferred restricted stock awards were
granted in 2005. These shares or units are nontransferable and
subject to forfeiture for periods prescribed by the Company.
These awards are valued at the market value at the date of grant
and are subsequently amortized over the periods
60
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share Data)
during which the restrictions lapse, generally 3 years.
Compensation expense recognized relating to the outstanding
restricted stock and deferred restricted stock was $183, $158,
and $74 in fiscal 2007, 2006, and 2005, respectively. At
December 30, 2007, the amount of total unrecognized
compensation cost related to restricted stock is $431 and the
weighted average period over which this will be expensed is
25 months.
In 2007 and 2006, as part of its annual equity grant to
executive officers and certain other employees, the
Companys Board of Directors approved the issuance of
contingent stock performance awards (the Stock Performance
Awards). These awards provide the recipients with the
ability to earn shares of the Companys Common Stock based
on the Companys achievement of stated cumulative diluted
earnings per share and cumulative net revenue targets over the
three fiscal years ended December 2009 for the 2007 award, and
over a ten quarter period beginning July 3, 2006 and ending
December 2008 for the 2006 award. Each Stock Performance Award
has a target number of shares of Common Stock associated with
such award which may be earned by the recipient if the Company
achieves the stated diluted earnings per share and revenue
targets. The ultimate amount of the award may vary, depending on
actual results, from 0% to 125% of the target number of shares.
The Compensation Committee of the Companys Board of
Directors has discretionary power to reduce the amount of the
award regardless of whether the stated targets are met. If the
Company achieves 100% of the stated targets, it would expect to
issue 1,194 shares under these awards.
Information with respect to Stock Performance Awards for 2007
and 2006 is as follows, assuming the Company achieves 100% of
the stated targets:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Outstanding at beginning of year
|
|
|
738
|
|
|
|
|
|
Granted
|
|
|
537
|
|
|
|
762
|
|
Forfeited
|
|
|
(81
|
)
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
1,194
|
|
|
|
738
|
|
|
|
|
|
|
|
|
|
|
Weighted average grant-date fair value:
|
|
|
|
|
|
|
|
|
Granted
|
|
|
28.74
|
|
|
|
19.00
|
|
Forfeited
|
|
|
22.89
|
|
|
|
18.82
|
|
Outstanding at end of year
|
|
|
23.12
|
|
|
|
19.01
|
|
During 2007 and 2006, the Company recognized $11,122 and $2,390,
respectively, of expense relating to these awards. If minimum
targets, as detailed under the award, are not met, no additional
compensation cost will be recognized and any previously
recognized compensation cost will be reversed. These awards were
valued at the market value at the dates of grant and are being
amortized over the three fiscal years ending December 2009
and over the 10 quarter period from July 3, 2006 through
December 2008 for the 2007 and 2006 awards, respectively.
At December 30, 2007, the amount of total unrecognized
compensation cost related to these awards is approximately
$16,664 and the weighted average period over which this will be
expensed is 19.42 months.
Prior to fiscal 2006, Hasbro used the intrinsic-value method of
accounting for stock options granted to employees and
non-employee members of the Board of Directors. Effective
December 26, 2005, the first day of fiscal 2006, the
Company adopted SFAS 123R under the modified prospective
transition method as defined in the statement. Under this
adoption method, the Company recorded stock option expense in
2006 based on all unvested stock options as of the adoption date
and any stock option awards made subsequent to the adoption
date. Stock-based compensation is recognized on a straight-line
basis over the requisite service period of the award. In
accordance with the modified prospective transition method, the
Companys consolidated financial statements for prior years
have not been restated to reflect, and do not include, the
impact of SFAS 123R.
61
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share Data)
Total compensation expense related to stock options and the
stock performance awards recognized under SFAS 123R for the
years ended December 30, 2007 and December 31, 2006
was $28,229 and $21,684, respectively, and was recorded as
follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Cost of sales
|
|
$
|
374
|
|
|
|
306
|
|
Research and product development
|
|
|
1,937
|
|
|
|
1,436
|
|
Selling, distribution and administration
|
|
|
25,918
|
|
|
|
19,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,229
|
|
|
|
21,684
|
|
Income tax expense
|
|
|
9,359
|
|
|
|
7,399
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,870
|
|
|
|
14,285
|
|
|
|
|
|
|
|
|
|
|
Information with respect to stock options for the three years
ended December 30, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Outstanding at beginning of year
|
|
|
17,309
|
|
|
|
20,443
|
|
|
|
21,041
|
|
Granted
|
|
|
2,243
|
|
|
|
3,126
|
|
|
|
2,953
|
|
Exercised
|
|
|
(4,586
|
)
|
|
|
(5,490
|
)
|
|
|
(3,020
|
)
|
Expired or canceled
|
|
|
(471
|
)
|
|
|
(770
|
)
|
|
|
(531
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
14,495
|
|
|
|
17,309
|
|
|
|
20,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
9,731
|
|
|
|
11,016
|
|
|
|
14,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average exercise price:
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
$
|
32.42
|
|
|
|
18.83
|
|
|
|
20.55
|
|
Exercised
|
|
$
|
18.04
|
|
|
|
16.00
|
|
|
|
15.00
|
|
Expired or canceled
|
|
$
|
26.60
|
|
|
|
24.38
|
|
|
|
25.07
|
|
Outstanding at end of year
|
|
$
|
22.01
|
|
|
|
19.73
|
|
|
|
19.04
|
|
Exercisable at end of year
|
|
$
|
20.48
|
|
|
|
19.94
|
|
|
|
19.29
|
|
With respect to the 14,495 outstanding options and 9,731 options
exercisable at December 30, 2007, the weighted average
remaining contractual life of these options was 4.83 years
and 4.37 years, respectively. The aggregate intrinsic value
of the options outstanding and exercisable at December 30,
2007 was $81,670 and $64,205, respectively.
The Company uses the Black-Scholes valuation model in
determining fair value of stock-based awards. The weighted
average fair value of options granted in fiscal 2007, 2006 and
2005 were $7.39, $4.26 and $5.41, respectively. The fair value
of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted
average assumptions used for grants in the fiscal years 2007,
2006, and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Risk-free interest rate
|
|
|
4.79
|
%
|
|
|
4.98
|
%
|
|
|
3.84
|
%
|
Expected dividend yield
|
|
|
1.97
|
%
|
|
|
2.55
|
%
|
|
|
1.75
|
%
|
Expected volatility
|
|
|
22
|
%
|
|
|
24
|
%
|
|
|
29
|
%
|
Expected option life
|
|
|
5 years
|
|
|
|
5 years
|
|
|
|
5 years
|
|
62
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share Data)
The intrinsic values, which represent the difference between the
fair market value on the date of exercise and the exercise price
of the option, of the options exercised in fiscal 2007, 2006 and
2005 were $54,629, $46,684 and $16,898, respectively.
At December 30, 2007, the amount of total unrecognized
compensation cost related to stock options is $18,221 and the
weighted average period over which this will be expensed is
23.69 months.
In 2007 and 2006, the Company granted 31 and 52 shares of
common stock, respectively, to its non-employee members of its
Board of Directors. Of these shares, the receipt of
19 shares from the 2007 grant and 43 shares from the
2006 grant have been deferred to the date upon which the
respective director ceases to be a member of the Companys
Board of Directors. These awards were valued at the market value
at the date of grant and vested upon grant. In connection with
this grant, compensation cost of $990 was recorded in both 2007
and 2006.
In 2007 certain warrants previously issued by the Company
allowing for the purchase of 1,700 shares of the
Companys common stock, with a weighted average exercise
price of approximately $16.99, were exercised. The holder of the
warrants elected to settle the warrants through a non-cash net
share settlement, resulting in the issuance of 779 shares.
If the holder had not elected net share settlement, the Company
would have received cash proceeds from the exercise totaling
$28,888 and would have been required to issue 1,700 shares.
In addition, during 2007 the Company exercised its call option
to repurchase warrants which allowed for the purchase of an
aggregate of 15,750 shares of the Companys common
stock. See note 6 for further discussion.
|
|
(11)
|
Pension,
Postretirement and Postemployment Benefits
|
Pension
and Postretirement Benefits
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans, (SFAS No. 158) which amends
Statements of Financial Accounting Standards No. 87, 88,
106 and 132R. Under SFAS No. 158, the Company is
required to recognize on its balance sheet actuarial gains and
losses and prior service costs that have not yet been included
in income as an adjustment of equity through other comprehensive
income with a corresponding adjustment to prepaid pension
expense or the accrued pension liability. In addition, within
two years of adoption, the measurement date for plan assets and
liabilities would be required to be the Companys fiscal
year end. The recognition provisions of SFAS No. 158
were effective for the Company in the fourth quarter of 2006.
The effect of this statement in 2006 on the Companys
defined benefit pension and postretirement plans was an increase
in accrued pension liability of $36,287, a decrease in
intangible assets of $3,108, an increase in deferred tax assets
of $12,645 and a decrease in accumulated other comprehensive
income, net of tax, of $26,750.
In accordance with SFAS No. 158, effective
January 1, 2007, the Company elected to change the
measurement date of certain of its defined benefit pension plans
and the Companys other postretirement plan from September
30 to the Companys fiscal year-end date, which was
December 30, 2007. As a result of this election, the assets
and liabilities of these plans were remeasured as of
December 31, 2006. The remeasurement of the assets and
liabilities resulted in an increase in the projected benefit
obligation of $536 and an increase in the fair value of plan
assets of $10,872. The impact of this accounting change was a
reduction of retained earnings of $2,143, an increase to
accumulated other comprehensive earnings of $7,779, a decrease
in long-term accrued pension expense of $3,619, an increase in
prepaid pension expense of $5,482, and a decrease in long-term
deferred tax assets of $3,465.
63
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share Data)
Expense related to the Companys defined benefit and
defined contribution plans for 2007, 2006 and 2005 were
approximately $25,900, $31,100, and $28,800, respectively. Of
these amounts, $13,400, $15,400 and $13,900 related to defined
contribution plans in the United States and certain
international affiliates. The remainder of the expense relates
to defined benefit plans discussed below.
United
States Plans
Substantially all United States employees are covered under at
least one of several non-contributory defined benefit pension
plans maintained by the Company. Benefits under the two major
plans which principally cover non-union employees, are based
primarily on salary and years of service. One of these major
plans is funded. Benefits under the remaining plans are based
primarily on fixed amounts for specified years of service. Of
these remaining plans, the plan covering union employees is also
funded.
In 2007, for the two major plans covering its non-union
employees, the Company froze benefits being accrued effective
December 30, 2007. In connection with this, the Company
recognized a reduction of its projected benefit obligation as a
result of this curtailment of $18,499 and recorded a curtailment
loss of $908. The pension benefit will be replaced by additional
employer contributions to the Companys defined
contribution plan beginning in 2008.
At December 30, 2007, the measurement date, the fair value
of the plan assets of the funded plans were in excess of those
plans benefit obligations while the unfunded plans of the
Company had an aggregate accumulated and projected benefit
obligation of $45,052. At September 30, 2006, all
individual plans had projected and accumulated benefit
obligations in excess of the fair value of each plans
assets.
Hasbro also provides certain postretirement health care and life
insurance benefits to eligible employees who retire and have
either attained age 65 with 5 years of service or
age 55 with 10 years of service. The cost of providing
these benefits on behalf of employees who retired prior to 1993
is and will continue to be substantially borne by the Company.
The cost of providing benefits on behalf of substantially all
employees who retire after 1992 is borne by the employee. The
plan is not funded. As noted above, in 2007, the Company adopted
the measurement date provisions of SFAS No. 158.
Reconciliations of the beginning and ending balances for the
year ended December 30, 2007, the transition period related
to the change in measurement date referred to above, and for the
year ended December 31, 2006 for the projected benefit
obligation and the fair value of plan assets are included below.
64
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Postretirement
|
|
|
|
|
|
|
Transition
|
|
|
|
|
|
|
|
|
Transition
|
|
|
|
|
|
|
2007
|
|
|
Period
|
|
|
2006
|
|
|
2007
|
|
|
Period
|
|
|
2006
|
|
|
Change in Projected Benefit Obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation beginning
|
|
$
|
308,133
|
|
|
|
309,021
|
|
|
|
313,937
|
|
|
|
37,463
|
|
|
|
36,318
|
|
|
|
38,505
|
|
Service cost
|
|
|
9,437
|
|
|
|
2,376
|
|
|
|
10,188
|
|
|
|
597
|
|
|
|
148
|
|
|
|
684
|
|
Interest cost
|
|
|
17,435
|
|
|
|
4,313
|
|
|
|
16,809
|
|
|
|
2,105
|
|
|
|
523
|
|
|
|
2,047
|
|
Actuarial loss (gain)
|
|
|
(7,901
|
)
|
|
|
(2,341
|
)
|
|
|
(8,014
|
)
|
|
|
(4,100
|
)
|
|
|
1,053
|
|
|
|
(2,358
|
)
|
Effect of curtailment
|
|
|
(18,499
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(19,781
|
)
|
|
|
(5,236
|
)
|
|
|
(23,291
|
)
|
|
|
(2,339
|
)
|
|
|
(579
|
)
|
|
|
(2,560
|
)
|
Expenses paid
|
|
|
(779
|
)
|
|
|
|
|
|
|
(608
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation ending
|
|
$
|
288,045
|
|
|
|
308,133
|
|
|
|
309,021
|
|
|
|
33,726
|
|
|
|
37,463
|
|
|
|
36,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation ending
|
|
$
|
288,045
|
|
|
|
308,133
|
|
|
|
290,452
|
|
|
|
33,726
|
|
|
|
37,463
|
|
|
|
36,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets beginning
|
|
$
|
270,926
|
|
|
|
235,482
|
|
|
|
208,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual return on plan assets
|
|
|
30,556
|
|
|
|
15,147
|
|
|
|
14,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer contribution
|
|
|
2,556
|
|
|
|
25,533
|
|
|
|
35,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(19,781
|
)
|
|
|
(5,236
|
)
|
|
|
(23,291
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses paid
|
|
|
(779
|
)
|
|
|
|
|
|
|
(608
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets ending
|
|
$
|
283,478
|
|
|
|
270,926
|
|
|
|
235,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Funded Status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
$
|
(288,045
|
)
|
|
|
(308,133
|
)
|
|
|
(309,021
|
)
|
|
|
(33,726
|
)
|
|
|
(37,463
|
)
|
|
|
(36,318
|
)
|
Fair value of plan assets
|
|
|
283,478
|
|
|
|
270,926
|
|
|
|
235,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions after measurement date
|
|
|
|
|
|
|
|
|
|
|
25,533
|
|
|
|
|
|
|
|
|
|
|
|
579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(4,567
|
)
|
|
|
(37,207
|
)
|
|
|
(48,006
|
)
|
|
|
(33,726
|
)
|
|
|
(37,463
|
)
|
|
|
(35,739
|
)
|
Unrecognized net loss
|
|
|
17,296
|
|
|
|
52,958
|
|
|
|
66,781
|
|
|
|
5,228
|
|
|
|
9,692
|
|
|
|
8,734
|
|
Unrecognized prior service cost
|
|
|
1,862
|
|
|
|
3,404
|
|
|
|
2,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
14,591
|
|
|
|
19,155
|
|
|
|
21,729
|
|
|
|
(28,498
|
)
|
|
|
(27,771
|
)
|
|
|
(27,005
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
$
|
40,485
|
|
|
|
5,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
|
(5,358
|
)
|
|
|
(3,065
|
)
|
|
|
(3,065
|
)
|
|
|
(2,400
|
)
|
|
|
(2,396
|
)
|
|
|
(2,396
|
)
|
Other liabilities
|
|
|
(39,694
|
)
|
|
|
(39,937
|
)
|
|
|
(44,941
|
)
|
|
|
(31,326
|
)
|
|
|
(35,067
|
)
|
|
|
(33,343
|
)
|
Accumulated other comprehensive earnings
|
|
|
19,158
|
|
|
|
56,362
|
|
|
|
69,735
|
|
|
|
5,228
|
|
|
|
9,692
|
|
|
|
8,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
14,591
|
|
|
|
19,155
|
|
|
|
21,729
|
|
|
|
(28,498
|
)
|
|
|
(27,771
|
)
|
|
|
(27,005
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In fiscal 2008, the Company expects amortization of unrecognized
net losses and unrecognized prior service cost of $993 and $302,
respectively, to be included as a component of net periodic
benefit cost.
65
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share Data)
Assumptions used to determine the year-end benefit obligation
are as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Weighted average discount rate
|
|
|
6.34
|
%
|
|
|
5.75
|
%
|
Rate of future compensation increases
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
Long-term rate of return on plan assets
|
|
|
8.75
|
%
|
|
|
8.75
|
%
|
Mortality table
|
|
|
RP-2000
|
|
|
|
RP-2000
|
|
The assumptions used to remeasure the benefit obligation using a
December 31, 2006 measurement date, as well as those used
to determine the expense for the transition period, were not
significantly different than the 2006 assumptions.
The assets of the funded plans are managed by investment
advisors and consist of the following:
|
|
|
|
|
|
|
|
|
Asset Category
|
|
2007
|
|
|
2006
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
Large Cap Equity
|
|
|
5
|
%
|
|
|
30
|
%
|
Small Cap Equity
|
|
|
8
|
|
|
|
14
|
|
International Equity
|
|
|
14
|
|
|
|
20
|
|
Other Equity
|
|
|
17
|
|
|
|
|
|
Fixed Income
|
|
|
40
|
|
|
|
20
|
|
Total Return Fund
|
|
|
16
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Hasbros two major funded plans (the Plans) are
defined benefit pension plans intended to provide retirement
benefits to participants in accordance with the benefit
structure established by Hasbro, Inc. The Plans investment
managers, who exercise full investment discretion within
guidelines outlined in the Plans Investment Policy, are
charged with managing the assets with the care, skill, prudence
and diligence that a prudent investment professional in similar
circumstance would exercise. Investment practices, at a minimum,
must comply with the Employee Retirement Income Security Act
(ERISA) and any other applicable laws and regulations.
The Plans asset allocations are structured to meet a
long-term targeted total return consistent with the ongoing
nature of the Plans liabilities. The shared long-term
total return goal, presently 8.75%, includes income plus
realized and unrealized gains
and/or
losses on the Plans assets. Utilizing generally accepted
diversification techniques, the Plans assets, in aggregate
and at the individual portfolio level, are invested so that the
total portfolio risk exposure and risk-adjusted returns best
meet the Plans long-term liabilities to employees. In
2007, the Company reevaluated its investment strategy and, as a
result, decided to change the asset allocation in order to more
closely align changes in the value of plan assets with changes
in the value of plan liabilities. This change in strategy
resulted in a transfer of assets into alternative investments
designed to achieve a modest absolute return in addition to the
return on an underlying asset class such as bond or equity
indices. These alternative investments may use derivatives to
gain market returns in an efficient and timely manner; however
derivatives are not used to leverage the portfolio beyond the
market value of the underlying assets. These alternative
investments are included in other equity and fixed income at
December 30, 2007. Plan asset allocations are reviewed at
least quarterly and rebalanced to achieve target allocation
among the asset categories when necessary.
The Plans investment managers are provided specific
guidelines under which they are to invest the assets assigned to
them. In general, investment managers are expected to remain
fully invested in their asset class
66
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share Data)
with further limitations of risk as related to investments in a
single security, portfolio turnover and credit quality.
With the exception of the alternative investment strategy
mentioned above, the Plans Investment Policy restricts the
use of derivatives associated with leverage or speculation. In
addition, the Investment Policy also restricts investments in
securities issued by Hasbro, Inc. except through index-related
strategies (e.g. an S&P 500 Index Fund)
and/or
commingled funds. In addition, unless specifically approved by
the Investment Committee (which is comprised of members of
management, established by the Board to manage and control
pension plan assets), certain securities, strategies, and
investments are ineligible for inclusion within the Plans.
As noted above, in 2007, the Company adopted the measurement
date provision of SFAS 158 and, accordingly, measured its
liabilities and related assets at December 30. Prior to
this, the Company measured its liabilities and related assets at
September 30. The discount rates used in the pension
calculation were also used for the postretirement calculation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Components of Net Periodic Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
9,437
|
|
|
|
10,188
|
|
|
|
9,384
|
|
Interest cost
|
|
|
17,435
|
|
|
|
16,809
|
|
|
|
15,526
|
|
Expected return on assets
|
|
|
(23,064
|
)
|
|
|
(19,112
|
)
|
|
|
(16,275
|
)
|
Amortization of prior service cost
|
|
|
634
|
|
|
|
596
|
|
|
|
582
|
|
Amortization of actuarial loss
|
|
|
1,768
|
|
|
|
3,399
|
|
|
|
2,554
|
|
Curtailment loss
|
|
|
908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
7,118
|
|
|
|
11,880
|
|
|
|
11,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
597
|
|
|
|
684
|
|
|
|
573
|
|
Interest cost
|
|
|
2,105
|
|
|
|
2,047
|
|
|
|
2,003
|
|
Amortization of actuarial loss
|
|
|
364
|
|
|
|
459
|
|
|
|
354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
3,066
|
|
|
|
3,190
|
|
|
|
2,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions used to determine net periodic benefit cost of the
pension plans for each fiscal year follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Weighted average discount rate
|
|
|
5.83
|
%
|
|
|
5.50
|
%
|
|
|
5.75
|
%
|
Rate of future compensation increases
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
Long-term rate of return on plan assets
|
|
|
8.75
|
%
|
|
|
8.75
|
%
|
|
|
8.75
|
%
|
Hasbro works with external benefit investment specialists to
assist in the development of the long-term rate of return
assumptions used to model and determine the overall asset
allocation. Forecast returns are based on the combination of
historical returns, current market conditions and a forecast for
the capital markets for the next 5-7 years. Approximately
75% of the return assumption is based on the historical
information and 25% is based on current or forward-looking
information. All asset class assumptions are within certain
bands around the long-term historical averages. Correlations are
based primarily on historical return patterns.
67
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share Data)
Expected benefit payments under the defined benefit pension
plans and expected gross benefit payments and subsidy receipts
under the postretirement benefit for the next five years
subsequent to 2007 and in the aggregate for the following five
years are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Benefit
|
|
|
Subsidy
|
|
|
|
Pension
|
|
|
Payments
|
|
|
Receipts
|
|
|
2008
|
|
$
|
19,992
|
|
|
|
2,582
|
|
|
|
275
|
|
2009
|
|
|
19,415
|
|
|
|
2,525
|
|
|
|
282
|
|
2010
|
|
|
18,430
|
|
|
|
2,619
|
|
|
|
287
|
|
2011
|
|
|
18,583
|
|
|
|
2,691
|
|
|
|
288
|
|
2012
|
|
|
19,324
|
|
|
|
2,750
|
|
|
|
286
|
|
2013-2017
|
|
|
103,050
|
|
|
|
13,986
|
|
|
|
1,284
|
|
Assumptions used to determine the net periodic benefit cost of
the postretirement plans for the year to date period are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Health care cost trend rate assumed for next year
|
|
|
9.00
|
%
|
|
|
10.00
|
%
|
|
|
9.00
|
%
|
Rate to which the cost trend rate is assumed to decline
(ultimate trend rate)
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
Year that the rate reaches the ultimate trend rate
|
|
|
2016
|
|
|
|
2012
|
|
|
|
2011
|
|
If the health care cost trend rate were increased one percentage
point in each year, the accumulated postretirement benefit
obligation at December 30, 2007 and the aggregate of the
benefits earned during the period and the interest cost would
have each increased by approximately 5%.
International
Plans
Pension coverage for employees of Hasbros international
subsidiaries is provided, to the extent deemed appropriate,
through separate defined benefit and defined contribution plans.
At December 30, 2007 and December 31, 2006, the
defined benefit plans had total projected benefit obligations of
$72,359 and $73,333, respectively, and fair values of plan
assets of $55,881 and $55,429, respectively. Substantially all
of the plan assets are invested in equity and fixed income
securities. The pension expense related to these plans was
$3,937, $3,702, and $3,073 in 2007, 2006 and 2005, respectively.
In fiscal 2008, the Company expects amortization of $120 of
prior service costs, $25 of unrecognized net losses and $52 of
unrecognized transition obligation to be included as a component
of net periodic benefit cost.
Expected benefit payments under the international defined
benefit pension plans for the five years subsequent to 2007 and
in the aggregate for the five years thereafter are as follows:
2008: $1,115; 2009: $1,244; 2010: $1,482; 2011: $1,635; 2012:
$2,398; and 2013 through 2017: $16,091.
Postemployment
Benefits
Hasbro has several plans covering certain groups of employees,
which may provide benefits to such employees following their
period of active employment but prior to their retirement. These
plans include certain severance plans which provide benefits to
employees involuntarily terminated and certain plans which
continue the Companys health and life insurance
contributions for employees who have left Hasbros employ
under terms of its long-term disability plan.
68
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share Data)
Hasbro occupies certain offices and uses certain equipment under
various operating lease arrangements. The rent expense under
such arrangements, net of sublease income which is not material,
for 2007, 2006, and 2005 amounted to $36,897, $34,603, and
$35,570, respectively.
Minimum rentals, net of minimum sublease income, which is not
material, under long-term operating leases for the five years
subsequent to 2007 and in the aggregate thereafter are as
follows: 2008: $27,236; 2009: $21,650; 2010: $10,828; 2011:
$9,793; 2012: $7,262; and thereafter: $16,165.
All leases expire prior to the end of 2018. Real estate taxes,
insurance and maintenance expenses are generally obligations of
the Company. It is expected that in the normal course of
business, leases that expire will be renewed or replaced by
leases on other properties; thus, it is anticipated that future
minimum lease commitments will not be less than the amounts
shown for 2007.
In addition, Hasbro leases certain facilities which, as a result
of restructurings, are no longer in use. Future costs relating
to such facilities were accrued as a component of the original
charge and are not included in minimum rental amounts above.
|
|
(13)
|
Derivative
Financial Instruments
|
Hasbro uses foreign currency forwards to reduce the impact of
currency rate fluctuations on firmly committed and projected
future foreign currency transactions. These instruments hedge
anticipated inventory purchases and other cross-border
transactions through 2010. At December 30, 2007, these
contracts had unrealized losses of $10,437, of which $6,679 are
recorded in accrued liabilities and $3,758 are recorded in other
liabilities.
During 2007, 2006, and 2005, the Company reclassified net
losses, net of tax, from other comprehensive income to earnings
of $6,887, $1,448, and $2,005, respectively, which included
gains (losses) of $(37), $(68), and $509, respectively, as the
result of ineffectiveness.
The remaining balance in AOCE at December 30, 2007 of
$11,080 represents a net unrealized loss on foreign currency
contracts relating to hedges of inventory purchased during the
fourth quarter of 2007 or forecasted to be purchased during 2008
through 2010 and intercompany expenses and royalty payments
expected to be paid or received during 2008 through 2010. These
amounts will be transferred to the consolidated statement of
operations upon the sale of the related inventory and receipt or
payment of the related royalties and expenses. Of the amount
included in AOCE at December 30, 2007, the Company expects
approximately $7,100 to be reclassified to the consolidated
statement of operations within the next 12 months.
The Company also enters into derivative instruments to offset
changes in the fair value of intercompany loans due to the
impact of foreign currency changes. The Company recorded a net
loss on these instruments to other (income) expense, net of
$2,098, $5,501, and $60,014 in 2007, 2006, and 2005,
respectively, relating to the change in fair value of such
derivatives, substantially offsetting gains from the change in
fair value of intercompany loans to which the contracts relate
included in other (income) expense, net.
|
|
(14)
|
Commitments
and Contingencies
|
Hasbro had unused open letters of credit and related instruments
of approximately $70,000 and $71,000 at December 30, 2007
and December 31, 2006, respectively.
The Company enters into license agreements with inventors,
designers and others for the use of intellectual properties in
its products. Certain of these agreements contain provisions for
the payment of guaranteed or minimum royalty amounts.
Additionally, the Company has a long-term commitment related to
69
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share Data)
promotional and marketing activities at a U.S. based theme
park. Under terms of existing agreements as of December 30,
2007, Hasbro may, provided the other party meets their
contractual commitment, be required to pay amounts as follows:
2008: $18,354; 2009: $19,691; 2010: $44,645; and 2011: $5,125.
In addition to the above commitments, certain of the above
contracts impose minimum marketing commitments on the Company.
The Company has $94,616 of prepaid royalties included as a
component of prepaid expenses and other current assets in the
balance sheet. The long-term portion of advances paid of $43,343
is included in other assets. Advanced royalties paid and
guaranteed or minimum royalties to be paid relate to anticipated
revenues in the years 2008 through 2018.
At December 30, 2007, the Company had approximately
$249,883 in outstanding purchase commitments.
Hasbro is party to certain legal proceedings, none of which,
individually or in the aggregate, is deemed to be material to
the financial condition of the Company.
Segment
and Geographic Information
The Company has two main operating segments, North America and
International. In addition, the Company has two other segments,
Global Operations and an other segment that licenses out certain
toy and game properties.
The North American segment includes the development, marketing
and selling of boys action figures, vehicles and playsets,
girls toys, electronic toys and games, plush products,
preschool toys and infant products, electronic interactive
products, tween electronic products, toy-related specialty
products, traditional board games and puzzles, DVD- based games,
fiction books, and trading card and role-playing games within
the United States, Canada and Mexico. Within the International
segment, the Company develops, markets and sells both toy and
certain game products in non-North American markets, primarily
the European, Asia Pacific, and Latin and South American
regions. The Global Operations segment is responsible for
manufacturing and sourcing finished product for the
Companys North American and International segments. The
Companys other segment licenses out certain toy and game
properties.
Segment performance is measured at the operating profit level.
Included in Corporate and eliminations are certain corporate
expenses, the elimination of intersegment transactions and
certain assets benefiting more than one segment. Intersegment
sales and transfers are reflected in management reports at
amounts approximating cost. Certain shared costs are allocated
to segments based upon foreign exchange rates fixed at the
beginning of the year, with adjustment to actual foreign
exchange rates included in Corporate and eliminations.
In 2006 the Company adopted SFAS 123R, which requires the
Company to record expense related to stock options in its
consolidated financial statements. Consistent with
managements approach in evaluating segment results, the
2005 segment operating profit (loss) has been adjusted to
include stock-based compensation as disclosed under
SFAS 123. The amount of 2005 stock option expense is
subtracted from the total segment operating profit (loss) in
order to reconcile to the operating profit in the consolidated
financial statements.
With the exception of the treatment of stock-based compensation
expense for 2005 management financial statements, the accounting
policies of the segments are the same as those referenced in
Note 1.
Results shown for fiscal years 2007, 2006 and 2005 are not
necessarily those which would be achieved were each segment an
unaffiliated business enterprise.
70
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share Data)
Information by segment and a reconciliation to reported amounts
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from
|
|
|
|
|
|
Operating
|
|
|
Depreciation
|
|
|
|
|
|
|
|
|
|
External
|
|
|
Affiliate
|
|
|
Profit
|
|
|
and
|
|
|
Capital
|
|
|
Total
|
|
|
|
Customers
|
|
|
Revenue
|
|
|
(Loss)
|
|
|
Amortization
|
|
|
Additions
|
|
|
Assets
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
2,460,016
|
|
|
|
8,094
|
|
|
|
318,737
|
|
|
|
50,237
|
|
|
|
8,917
|
|
|
|
3,770,504
|
|
International
|
|
|
1,278,589
|
|
|
|
|
|
|
|
158,846
|
|
|
|
21,639
|
|
|
|
3,326
|
|
|
|
1,159,173
|
|
Global Operations(a)
|
|
|
11,707
|
|
|
|
1,493,750
|
|
|
|
19,483
|
|
|
|
67,519
|
|
|
|
61,678
|
|
|
|
1,337,321
|
|
Other Segment
|
|
|
87,245
|
|
|
|
|
|
|
|
38,881
|
|
|
|
3,515
|
|
|
|
371
|
|
|
|
179,095
|
|
Corporate and eliminations(b)
|
|
|
|
|
|
|
(1,501,844
|
)
|
|
|
(16,597
|
)
|
|
|
13,610
|
|
|
|
17,240
|
|
|
|
(3,209,030
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Total
|
|
$
|
3,837,557
|
|
|
|
|
|
|
|
519,350
|
|
|
|
156,520
|
|
|
|
91,532
|
|
|
|
3,237,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
2,130,290
|
|
|
|
8,266
|
|
|
|
275,959
|
|
|
|
51,926
|
|
|
|
4,278
|
|
|
|
3,193,870
|
|
International
|
|
|
959,319
|
|
|
|
23
|
|
|
|
90,893
|
|
|
|
24,681
|
|
|
|
3,004
|
|
|
|
859,690
|
|
Global Operations(a)
|
|
|
13,185
|
|
|
|
1,242,354
|
|
|
|
27,158
|
|
|
|
46,584
|
|
|
|
57,487
|
|
|
|
1,073,871
|
|
Other Segment
|
|
|
48,687
|
|
|
|
|
|
|
|
15,729
|
|
|
|
2,002
|
|
|
|
105
|
|
|
|
134,970
|
|
Corporate and eliminations(b)
|
|
|
|
|
|
|
(1,250,643
|
)
|
|
|
(33,376
|
)
|
|
|
21,514
|
|
|
|
17,229
|
|
|
|
(2,165,496
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Total
|
|
$
|
3,151,481
|
|
|
|
|
|
|
|
376,363
|
|
|
|
146,707
|
|
|
|
82,103
|
|
|
|
3,096,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
2,038,556
|
|
|
|
11,042
|
|
|
|
165,676
|
|
|
|
78,562
|
|
|
|
7,394
|
|
|
|
2,658,821
|
|
International
|
|
|
988,591
|
|
|
|
124
|
|
|
|
106,435
|
|
|
|
33,048
|
|
|
|
3,866
|
|
|
|
811,577
|
|
Global Operations(a)
|
|
|
10,612
|
|
|
|
1,171,150
|
|
|
|
22,712
|
|
|
|
53,919
|
|
|
|
49,701
|
|
|
|
866,125
|
|
Other Segment
|
|
|
49,868
|
|
|
|
|
|
|
|
19,153
|
|
|
|
997
|
|
|
|
108
|
|
|
|
115,864
|
|
Corporate and eliminations(b)
|
|
|
|
|
|
|
(1,182,316
|
)
|
|
|
(26,499
|
)
|
|
|
13,606
|
|
|
|
9,515
|
|
|
|
(1,151,244
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
3,087,627
|
|
|
|
|
|
|
|
287,477
|
|
|
|
180,132
|
|
|
|
70,584
|
|
|
|
3,301,143
|
|
Stock Compensation(c)
|
|
|
|
|
|
|
|
|
|
|
23,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Total
|
|
$
|
3,087,627
|
|
|
|
|
|
|
|
310,521
|
|
|
|
180,132
|
|
|
|
70,584
|
|
|
|
3,301,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The Global Operations segment derives substantially all of its
revenues, and thus its operating results, from intersegment
activities. Operating profit of the Global Operations segment
for the fiscal year 2006 includes a charge of approximately
$11,200, primarily related to severance costs, in connection
with the reduction of manufacturing activity at the Company
facility in Ireland. |
|
(b) |
|
Certain intangible assets, primarily goodwill, which benefit
operating segments are reflected as Corporate assets for segment
reporting purposes. For application of SFAS 142, these
amounts have been allocated to the reporting unit which benefits
from their use. In addition, allocations of certain expenses
related to these assets to the individual operating segments are
done at the beginning of the year based on budgeted amounts. Any
difference between actual and budgeted amounts are reflected in
the Corporate segment. |
|
(c) |
|
As noted in footnote 10, on December 26, 2005, the first
day of fiscal 2006, the Company adopted SFAS 123R using the
modified prospective method. Under this method, the Company
recorded stock |
71
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share Data)
|
|
|
|
|
option compensation in 2006 related to unvested options as of
that date as well as grants made in 2006. The Company did not
restate any of the prior years but has adjusted the operating
profit (loss) of each of its segments for 2005 to reflect
compensation for that period based on the Companys 2005
pro forma disclosures under SFAS 123. As such, the above
amounts represent the removal of the amounts included in the
segment disclosures to reconcile to the 2005 reported
consolidated operating profit for 2005. The $23,044 of 2005 pro
forma stock option expense was allocated as follows: $15,417 to
North America, $4,309 to International, $1,774 to Global
Operations and $1,544 to Other Segment. |
The following table presents consolidated net revenues by
classes of principal products for the three fiscal years ended
December 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Games and puzzles
|
|
$
|
1,323,641
|
|
|
|
1,294,110
|
|
|
|
1,246,422
|
|
Boys toys
|
|
|
1,024,023
|
|
|
|
575,841
|
|
|
|
721,770
|
|
Girls toys
|
|
|
697,304
|
|
|
|
540,298
|
|
|
|
446,822
|
|
Preschool toys
|
|
|
434,893
|
|
|
|
406,663
|
|
|
|
334,729
|
|
Tweens toys
|
|
|
252,055
|
|
|
|
266,844
|
|
|
|
269,826
|
|
Other
|
|
|
105,641
|
|
|
|
67,725
|
|
|
|
68,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
3,837,557
|
|
|
|
3,151,481
|
|
|
|
3,087,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the 2007 fiscal year, revenues generated from the sale of
TRANSFORMERS products accounted for 12.6% of consolidated net
revenues. During 2005, revenues from STAR WARS related products
accounted for 16% of consolidated net revenues. No other
individual product lines accounted for 10% or more of
consolidated net revenues in 2007 or 2005. No individual product
lines accounted for 10% or more of consolidated net revenues
during 2006.
Information as to Hasbros operations in different
geographical areas is presented below on the basis the Company
uses to manage its business. Net revenues are categorized based
on location of the customer, while long-lived assets (property,
plant and equipment, goodwill and other intangibles) are
categorized based on their location:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
2,210,840
|
|
|
|
1,898,865
|
|
|
|
1,846,217
|
|
International
|
|
|
1,626,717
|
|
|
|
1,252,616
|
|
|
|
1,241,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,837,557
|
|
|
|
3,151,481
|
|
|
|
3,087,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,011,660
|
|
|
|
1,051,124
|
|
|
|
1,127,100
|
|
International
|
|
|
133,709
|
|
|
|
132,797
|
|
|
|
117,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,145,369
|
|
|
|
1,183,921
|
|
|
|
1,244,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal international markets include Europe, Canada, Mexico,
Australia, and Hong Kong.
Other
Information
Hasbro markets its products primarily to customers in the retail
sector. Although the Company closely monitors the
creditworthiness of its customers, adjusting credit policies and
limits as deemed appropriate, a
72
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share Data)
substantial portion of its customers ability to discharge
amounts owed is generally dependent upon the overall retail
economic environment.
Sales to the Companys three largest customers, Wal-Mart
Stores, Inc., Target Corporation and Toys R Us,
Inc., amounted to 24%, 12% and 11%, respectively, of
consolidated net revenues during 2007, 24%, 13% and 11% during
2006 and 24%, 12% and 12% during 2005. These net revenues were
primarily related to the North American segment.
Hasbro purchases certain components used in its manufacturing
process and certain finished products from manufacturers in the
Far East. The Companys reliance on external sources of
manufacturing can be shifted, over a period of time, to
alternative sources of supply for products it sells, should such
changes be necessary. However, if the Company were prevented
from obtaining products from a substantial number of its current
Far East suppliers due to political, labor or other factors
beyond its control, the Companys operations would be
disrupted, potentially for a significant period of time, while
alternative sources of product were secured. The imposition of
trade sanctions by the United States or the European Union
against a class of products imported by Hasbro from, or the loss
of normal trade relations status by, the
Peoples Republic of China could significantly increase the
cost of the Companys products imported into the United
States or Europe.
73
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share Data)